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SECURITIES AND EXCHANGE COMMISSION
17 CFR PARTS 228, 229, 240, and 242
[Release Nos. 33-7282; 34-37094; IC-21883;
International Series Release No. 965; File No. S7-11-96]
RIN 3235-AF54
Trading Practices Rules Concerning Securities Offerings
AGENCY: Securities and Exchange Commission.
ACTION: Proposed Rules.
SUMMARY: The Securities and Exchange Commission ("Commission")
today is publishing for comment a new regulation containing
trading practices rules governing securities offerings. Proposed
new Regulation M would replace Rules 10b-6, 10b-6A, 10b-7, 10b-8,
and 10b-21 under the Securities Exchange Act of 1934. Reflecting
the significant developments and innovations that have occurred
in the securities markets during recent years, the proposed
regulation would create a simpler, more flexible framework to
govern the market conduct of persons with a significant interest
in the outcome of an offering. The proposals are designed to
reduce regulatory burdens on issuers, underwriters, and other
offering participants by focusing restrictions on potentially
manipulative conduct in connection with the pricing of an
offering, while retaining core investor safeguards.
DATES: The comment period will expire on [60 days after date of
publication in the Federal Register].
ADDRESSES: Comments should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. Comments also
may be submitted electronically at the following E-mail address:
rule-comments@sec.gov. All comment letters should refer to File
No. S7-11-96; this file number should be included on the subject
line if E-mail is used. Comments letters received will be
available for public inspection and copying at the Commission's
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
20549. Electronically submitted comment letters will be posted
on the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Any of the following attorneys
in the Office of Risk Management and Control, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street,
N.W., Mail Stop 5-1, Washington, D.C. 20549, at 202-942-0772:
Nancy J. Sanow, M. Blair Corkran, K. Susan Grafton, Carlene S.
Kim, Heidi E. Pilpel, Barbara J. Endres, John S. Markle, Lauren
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C. Mullen, Mark R. Pacioni, Alan J. Reed, or Marc J. Hertzberg.
SUPPLEMENTARY INFORMATION: The Commission is proposing for
comment new Regulation M, which would be adopted under various
provisions of the Securities Act of 1933 ("Securities Act"), 1/
the Securities Exchange Act of 1934 ("Exchange Act"), 2/ and
other federal securities statutes, and would replace Rules 10b-6,
10b-6A, 10b-7, 10b-8, and 10b-21 ("trading practices rules"). 3/
Proposed Regulation M, consisting of six rules, would set forth a
new approach to regulation of securities offerings that reflects
the incentives to affect the price of the offered security during
an offering, while acknowledging the different needs of various
categories of offering participants to conduct ordinary market
activities. Regulation M would contain separate rules for
underwriters, prospective underwriters, participating broker-
dealers ("distribution participants"), and their affiliated
purchasers; and for issuers and other persons on whose behalf a
distribution is being made and their affiliated purchasers. 4/
The proposed rules would retain the current prophylactic
approach to anti-manipulation regulation as the most effective
means of protecting the integrity of the market during a
securities offering. Regulation M, however, would streamline and
simplify the trading practices rules by, among other things:
¨ Eliminating restrictions on actively-traded securities.
¨ Reducing the period of trading restrictions for many
other securities, and focusing that period on the
pricing of the offering.
¨ Eliminating trading restrictions on derivative
securities during a distribution of an underlying
security.
1/ 15 U.S.C. 77a et seq.
2/ 15 U.S.C. 78a et seq.
3/ 17 CFR 240.10b-6, 240.10b-6A, 240.10b-7, 240.10b-8, and
240.10b-21. The proposed rules also would make conforming
and clarifying changes to Items 502(d) and 508 of Regulation
S-B and Regulation S-K, and to Rules 10b-18 and 17a-2 under
the Exchange Act. 17 CFR 228.502(d), 229.502(d), 228.508,
229.508, 240.10b-18, and 240.17a-2, respectively.
4/ The term "distribution participant," which is defined in
proposed Rule 100 and discussed further below, has a
narrower meaning than its use in the current trading
practices rules.
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¨ Narrowing substantially the restrictions on debt
securities.
¨ Deregulating rights offerings.
¨ Allowing routine dissemination of research reports,
transactions in baskets of securities, exercises of
call options, and transactions complying with Rule 144A
under the Securities Act. 5/
¨ Creating a de minimis exception for transactions that
are unlikely to have market impact.
¨ Narrowing the scope of persons subject to the rules.
¨ Allowing greater flexibility for issuer plans and odd-
lot programs.
¨ Expanding the scope of Nasdaq passive market making.
¨ Creating a more flexible framework for stabilizing
transactions.
¨ Shortening the regulated period for short sales in
connection with a public offering.
I. INTRODUCTION
A. Background
A fundamental goal of the federal securities laws is the
prevention of manipulation. Manipulation impedes the securities
markets from functioning as an independent pricing mechanism, and
undermines the integrity and fairness of those markets. Congress
granted broad rulemaking authority to the Commission to combat
manipulative abuses in whatever form they might take, including
anti-fraud, prophylactic, and general rulemaking authority. In
exercising its authority, the Commission has focused on the
market activities of persons participating in a securities
offering. The Commission determined that securities offerings
present special opportunities and incentives for manipulation,
requiring specific regulatory attention. After developing
experience in administering the general anti-fraud and anti-
manipulation provisions of the Exchange Act, 6/ the Commission
in 1955 adopted Rules 10b-6, 10b-7, and 10b-8 to govern the
5/ 17 CFR 230.144A.
6/ Sections 9(a)(2), 10(b), and 15(c), 15 U.S.C. 78i(a)(2),
78j(b), and 78o(c).
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market activity of persons with an interest in an offering's
outcome. 7/ These rules are intended to protect the integrity
of the offering process by precluding activities that could
influence artificially the market for the offered security.
The trading practices rules have served their purposes well.
Today, the U.S. capital markets' unparalleled reputation for
honesty and fairness attracts not only domestic issuers, but also
an increasing number of foreign issuers that offer their
securities here to gain both broader market recognition and cost-
effective financing. These rules contribute to investors' high
degree of confidence that the offering price has not been
influenced artificially by the conduct of offering participants.
Since the adoption of the Commission's trading practices
rules over 40 years ago, and the last substantive revisions to
Rule 10b-6 in the 1980s, the markets and their participants have
changed significantly. Institutional investors, such as mutual
funds and pension plans, have become major "buy-side"
participants in securities offerings. 8/ The market
sophistication and bargaining power of such investors now provide
important protections against abusive conduct on the "sell-side"
of an offering. The secondary markets have become more
transparent and trading volume has increased substantially.
Increased transparency helps investors, analysts, and other
market participants to better observe and evaluate unusual market
price movements. Increased liquidity makes manipulation less
cost-effective.
Self-regulatory organizations ("SROs") have developed
sophisticated surveillance technologies to monitor market
activity on a real-time basis. The SROs' ability to surveil
trading during a distribution serves a substantial deterrence
function. The ready availability of transaction audit trails
also enhances the Commission's and the SROs' ability to take
appropriate enforcement action. As a consequence, manipulation
of the actively-traded securities of large issuers has become
more costly, and its success more uncertain.
The process of distributing securities also has evolved.
Shelf-registered offerings have become a common method of raising
capital in recent years, and equity shelf offerings are
7/ Securities Exchange Act Release No. 5194 (July 5, 1955), 20
FR 5075.
8/ As of December 1995, mutual funds controlled more than $2.8
trillion in assets. See Investment Company Institute Press
Release (January 25, 1996).
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increasing. 9/ Instead of engaging in formal stabilization,
underwriters now routinely "oversell" an offering, which can
result in substantial purchasing activity in the form of short
covering transactions after an offering has been distributed.
Today, rights offerings rarely are used as a financing tool by
U.S. issuers.
Equity and debt offerings and the secondary markets have
become international in scope. Many issuers' securities now are
traded in financial centers throughout the world, providing
issuers with expanded financing opportunities. U.S. investors
are now active participants in U.S. offerings of foreign issuers.
Globalization also has revealed differing, and at times
conflicting, regulatory structures and offering practices.
These developments have outpaced the current structure of
anti-manipulation regulation of securities offerings and have
reduced the need for broad prophylactic restrictions. Moreover,
the Commission has been advised by market participants that the
application of the trading practices rules in the present
environment has become needlessly complex and involves
substantial compliance costs.
B. Concept Release
In April 1994, the Commission published a concept release as
part of a comprehensive reexamination of its anti-manipulation
regulation of securities offerings ("Concept Release"). 10/ The
release identified eight concepts that underlie the trading
practices rules and anti-manipulation regulation generally. The
premise underlying these concepts is that regulation should be
limited to those persons, securities offerings, and market
activities that involve a readily identifiable incentive to
manipulate the market during an offering. In considering the
need for a revised regulatory approach, the Commission requested
that commenters focus on two central themes: whether certain
classes of securities, transactions, or investors need the
protection of specific rules; and whether a simpler structure for
anti-manipulation regulation would achieve the goals of providing
9/ In 1992, equity takedowns from shelf registrations accounted
for 3% of all underwritten offers of additional common
stock, while in 1994, equity takedowns accounted for 16% of
the total value of such underwritten offerings. See also M.
Santoli, Block Trades Test Traditions on Wall Street, Wall
St. J., Feb. 9, 1996, at B12B ("Shelf filings that cover
equity have steadily become more common in recent years,
rising 18% to 110 in 1995 after climbing 26% in 1994.")
10/ Securities Exchange Act Release No. 33924 (April 19, 1994),
59 FR 21681 ("Concept Release").
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guidance to underwriters and their counsel, maintaining price
integrity, establishing effective deterrence and enforcement
tools, and promoting investor confidence. The Commission
solicited comment on several alternative regulatory approaches.
Twenty-two comment letters were received. 11/ All
commenters appeared to accept the fundamental objectives of the
trading practices rules of preventing manipulation during a
securities offering and providing guidance to the underwriting
community, principally as expressed in the exceptions to Rule
10b-6. Many commenters questioned the need for mechanical and
complex proscriptive rules as opposed to a simpler, more flexible
approach to anti-manipulation regulation. Of the various
regulatory alternatives noted in the Concept Release, commenters
addressed three: (1) retaining the current structure, but
relaxing restrictions; (2) more flexible stabilization
regulation; and (3) safe harbor rules.
Many commenters proposed revising the current exceptions and
adding new exceptions to the prohibitions of Rule 10b-6.
Suggested approaches varied, but the dominant themes were to:
shorten the period of restrictions; ease the application of the
rules in multinational distributions; allow issuers greater
flexibility in conducting dividend reinvestment and stock
purchase plans; and narrow the scope of persons subject to
restrictions.
With respect to multinational distributions, several
commenters stated that extraterritorial application of the
trading practices rules disadvantages U.S. participants, because
foreign issuers sometimes will not engage in U.S. securities
distributions that require compliance with the rules. Some
commenters proposed exceptions from the trading practices rules
for "world-class" issuers.
With respect to stabilization, commenters stated that the
Commission should create a flexible structure that would allow
underwriters to follow the independent market price for the
offered security. Commenters also suggested that the Commission
expand and adopt prior proposals to accommodate multinational
stabilizing transactions. The commenters were divided, however,
on whether the Commission should regulate transactions in the
aftermarket of a distribution, such as the covering of syndicate
short positions and the enforcing of penalty bids.
Representatives of the underwriting industry argued that no
regulation was warranted at this time. Other commenters asserted
that certain aftermarket activity by the underwriting syndicate,
11/ The comment letters and a summary of those comments which
was prepared by the staff are available for public
inspection and copying in File No. S7-14-94.
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such as enforcing penalty bids, can have a manipulative impact
and can create conflicts of interest for broker-dealers.
Commenters also suggested that the restrictions on "passive
market making" in Rule 10b-6A be relaxed. The few commenters who
addressed Rule 10b-8 suggested that underwriters should have
greater flexibility in effecting transactions during rights
offerings. Two commenters stated that Rule 10b-21 was
ineffectual because it did not cover securities that were related
to the offered security.
While directing the majority of their comments to specific
provisions of the trading practices rules, many commenters
endorsed recasting the rules as non-exclusive safe harbors from
the anti-manipulation provisions of the Exchange Act. 12/ In
support of this proposal, they asserted that Rule 10b-6 can have
a disproportionate effect on those offering participants who
inadvertently run afoul of the rule's prohibitions because of
"technical" violations that do not affect the offered security's
price.
II. OVERVIEW OF PROPOSED REGULATION M
In light of the comments received and the recommendations of
the Commission's Task Force on Disclosure Simplification, the
Commission is proposing to replace the existing trading practices
rules with new Regulation M, consisting of individual rules
covering distinct categories of offering participants and
activities. 13/ The new regulation would continue to effectuate
the goals of the existing trading practices rules. The
Commission, however, recognizes that the current rules impose
unwarranted costs on the capital raising process because they are
overly broad and unnecessarily rigid.
The Commission's proposals seek to accomplish several
objectives. The proposed rules are intended to eliminate
unnecessary costs and burdens imposed on offering participants
under the current rules. These impediments would be reduced by
relaxing existing restrictions in those circumstances where
either the risk of manipulation appears small or the costs of the
restrictions are disproportionate to the purposes that they
serve. For example, relaxation of restrictions seems
particularly appropriate in cases where the expense of
12/ The American Bar Association ("ABA") and the Securities
Industry Association drafted proposed rule texts for the
staff's consideration, which are included in File No. S7-14-
94.
13/ See Report of the Task Force on Disclosure Simplification
77-79 (March 1996) ("Task Force Report").
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manipulating a security would be high or where improper trading
activity would be easy to detect, because the risk of
manipulation in such situations may be far less than in other
offerings.
The proposed rules also seek to simplify and modernize the
trading practices rules. These goals are accomplished by
reorganizing the structure of the rules, reducing their
complexity, and tailoring the concepts to accommodate
contemporary market activities.
Regulation M would contain rules covering the following
activities during a securities offering: (1) activities by
underwriters, prospective underwriters, brokers, dealers, or
other persons who are participating in a distribution, and their
affiliated purchasers (i.e., distribution participants); (2)
activities by the issuer or selling securityholder and their
affiliated purchasers; (3) Nasdaq passive market making; (4)
stabilization, transactions to cover syndicate short positions,
and penalty bids; and (5) short selling in advance of a public
offering. The general anti-fraud and anti-manipulation
provisions of the federal securities laws, including Section
17(a) of the Securities Act, and Sections 9(a), 10(b), and 15(c)
of the Exchange Act, and Rule 10b-5 thereunder, would continue to
govern all activities in connection with an offering, whether or
not the provisions of Regulation M applied.
A separate rule would contain definitional provisions. Some
of these definitions are new or revised; many are common to more
than one rule. The Commission has endeavored to use
straightforward and precise language in both the definitions and
rule text.
The provisions of Regulation M that are analogous to Rule
10b-6 would be contained in Rules 101 and 102, which would cover
distribution participants, and issuers and selling
securityholders, respectively. Rules 101 and 102 would apply
only during a "restricted period" that would commence one or five
business days before the day of the pricing of the offered
security and continue until the distribution is over. The
restricted periods would be based on the trading volume of the
offered security, rather than the price per share and public
float criteria used in Rule 10b-6. The restricted periods of
Regulation M would focus more specifically on the time of
pricing. In contrast, Rule 10b-6 imposes restrictions during the
entire distribution, which can extend over a lengthy period of
time, but excepts certain trading activities prior to a two or
nine business day "cooling-off period." The applicable cooling-
off period is keyed off of the commencement of offers and sales.
While Rule 10b-6 is intended to protect the pricing of an
offering, certain distribution methods, particularly in
connection with foreign offerings, can result in the cooling-off
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periods commencing after an offering has been priced.
Rule 101 would exclude from its coverage more actively-
traded securities, many investment grade securities, and Rule
144A transactions. Further, Rule 101 would focus on the security
being distributed and would not cover related derivative
securities. It would permit the routine dissemination of
research reports, exercises of options and other securities, and
transactions in baskets of securities involving the offered
security, among other transactions. In addition, Rule 101 would
deal with "inadvertent" violations during the restricted period
by excusing de minimis transactions, provided that a distribution
participant had in place policies and procedures reasonably
designed to achieve compliance with the rule. The scope of
persons subject to the proposed rule would be narrowed by
recognizing "information barriers" between the distribution
participant and its affiliates.
Rule 102 would cover issuers, selling securityholders, and
related persons. Issuers and selling securityholders would be
able to engage in market activities prior to the applicable
restricted period. During the restricted period, Rule 102 would
permit bids and purchases of odd-lots, transactions in connection
with issuer plans, and exercises of options or convertible
securities by the issuer's affiliated purchasers. This rule
would not contain an exception for actively-traded securities.
The proposals also would reflect the view that the safe harbor of
Rule 10b-18 under the Exchange Act is not available during a
distribution. 14/
Proposed Rule 103 would govern Nasdaq passive market making
and replace Rule 10b-6A. The new rule would extend to all Nasdaq
securities and nearly all distributions, and would permit more
distribution participants to engage in passive market making.
Proposed Rule 104 would regulate stabilizing and other
activities related to a distribution. The rule would allow
underwriters to initiate and change stabilizing bids based on the
current price in the principal market (whether U.S. or foreign),
as long as the bid did not exceed the offering price. Rule 104
also would address the fact that underwriters engage in
substantial syndicate-related market activity, and enforce
penalty bids in order to reduce volatility in the market for the
offered security. These activities are analogous to traditional
stabilizing under Rule 10b-7. The proposed rule would require
disclosure and recordkeeping with respect to these aftermarket
activities.
Proposed Rule 105 essentially would recodify Rule 10b-21
14/ 17 CFR 240.10b-18.
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governing short selling in connection with a public offering. To
harmonize Rule 105 with the provisions of Rules 101 and 102, the
period of Rule 105's coverage would be narrowed to the five
business day period before pricing, rather than the period
extending from the time of filing of offering materials to the
time when sales may be made. This release requests comment,
however, on the continued need for a separate rule regulating
such short selling.
The Commission believes that separate regulation of rights
offerings, as contained in Rule 10b-8, may no longer be
warranted. U.S. issuers infrequently use rights offerings to
raise capital. Even when they do, purchases of rights generally
would not be an efficient way for a distribution participant to
facilitate the offering of the underlying security. In addition,
the Commission believes that many rights offerings by foreign
issuers would fall within the exception for actively-traded
securities contained in Rule 101. Therefore, the proposals would
rescind Rule 10b-8.
The proposed trading practices rules, like the current
rules, would apply to all distribution participants in a
multinational offering of securities, as well as the issuer and
any selling securityholders or affiliated purchasers, if the
offering occurs at least in part in the United States. In
connection with the Concept Release, as noted above, several
commenters addressed the application of the trading practices
rules to multinational offerings. Regulation M would not
distinguish between domestic and multinational offerings subject
to the Commission's regulatory jurisdiction. Nevertheless, the
proposed rules respond to the concerns of these commenters. In
particular, the exceptions to Rule 101 for actively-traded
securities, and the exclusion of affiliates of distribution
participants where the distribution participant maintains and
enforces certain information-flow restrictions, should facilitate
the ability of issuers and underwriters to conduct multinational
offerings.
Many terms and concepts in Regulation M would have the same
meaning as under the trading practices rules (e.g., the
definition of "distribution"), and current interpretations
regarding such terms or concepts would be relevant to the new
rules. Exemptions granted and no-action positions taken under
the current rules no longer would be in effect under Regulation M
because the rules under which they were issued would be
rescinded. Many of these exemptions and no-action positions,
however, are proposed to be codified and, in many cases, expanded
under the new rules. Others no longer would be necessary in view
of the provisions of the new rules. The Commission believes that
the broad scope of these amendments will greatly reduce the need
for the issuance of exemptions from the proposed rules. In
reviewing the proposals, commenters are urged to consider their
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implications for existing exemptions, no-action positions, and
interpretations.
The new regulatory framework should relieve market
participants of unnecessary burdens and respond effectively to a
changing marketplace, while maintaining essential investor
protection. The following sections of this release describe the
individual provisions of Rules 100 through 105 and discuss, where
appropriate, how they would differ from current anti-manipulation
regulation and why the Commission is proposing such changes.
Comment is solicited throughout the release regarding specific
aspects of the proposals. In addition to responding to these
questions, commenters are encouraged to state how the proposed
rules either would or would not accomplish the goals of
Regulation M.
III. DISCUSSION OF PROPOSED REGULATION M AND RELATED AMENDMENTS
A. Rule 100 - Definitions
Proposed Rule 100 would set forth the definitions that apply
to all of the rules contained in Regulation M. Many of the terms
in Rule 100 are defined in the trading practices rules, although
the definitions of some of these terms have been revised to
reflect commenters' suggestions. The Commission also proposes to
codify terms that have been used in interpretations, or are the
subject of outstanding Commission proposals. 15/ Other terms
are new, and are integral to the fundamental changes that are
reflected by Regulation M. Individual definitions are discussed
later in this release in connection with the particular aspects
of Regulation M to which they relate.
Q1. Do any of the definitions need to be clarified or
modified? Are there other terms used in Regulation M that should
be defined in Rule 100?
B. Rule 101 - Activities by Distribution Participants
1. Overview of Rule 101
This proposed rule would include significant similarities to
as well as differences from Rule 10b-6. Rule 101, like Rule 10b-
6, would place restrictions on the activities of distribution
participants and their affiliated purchasers during the
15/ See Securities Exchange Act Release No. 28732 (January 3,
1991), 56 FR 814 (proposing amendments to Rule 10b-7);
Securities Exchange Act Release No. 28733 (January 3, 1991),
56 FR 820 (proposing definitional Rule 3b-10) (collectively,
"1991 Proposals"). These proposals would be withdrawn upon
adoption of Regulation M.
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distribution period. 16/ However, while Rule 10b-6 applies
during the entire distribution period, which extends from the
time the issuer determines to go forward with the offering until
all sales efforts end, the rule contains exceptions permitting
certain transactions until the commencement of cooling-off
periods. In contrast, Rule 101 would apply only during the
period commencing one or five business days immediately preceding
pricing of the offering and ending when sales efforts cease.
Both Rule 101 and Rule 10b-6 cover securities that are the
subject of the distribution. Rule 101 would not apply to any
security with an average daily trading volume ("ADTV") with a
value of $1 million or more, or to any related derivative
securities. Rule 101, however, would apply to transactions in an
underlying security (i.e., a "reference security") during a
distribution of a derivative security.
Rule 101 and Rule 10b-6 apply to distribution participants
and their affiliated purchasers. For purposes of Rule 101,
"distribution participant" would refer to underwriters,
prospective underwriters, brokers, dealers, and other persons who
have agreed to participate or are participating in a
distribution. Issuers and selling securityholders and their
affiliated purchasers, which also are covered by Rule 10b-6,
would be subject to proposed Rule 102. The definition of
"affiliated purchaser" would be narrower than that contained in
Rule 10b-6, and would recognize the use of information barriers
to separate distribution participants' corporate financing
activities from the trading operations of their affiliates.
Rule 101 would contain exceptions from its proscriptions for
activity that is necessary to permit the offering to proceed; to
limit adverse effects on the trading market that could result
from these prohibitions; and to allow conduct that is not likely
to have a manipulative impact.
Moreover, the Commission has simplified the language used in
Rule 101, and believes that the proposed rule reflects the
broader sources of statutory authority under which Regulation M
would be adopted, including the anti-fraud provisions, the
statutory authority to adopt "means reasonably designed to
prevent" fraud and manipulation, and the Commission's general
rulemaking authority. Rule 101 explicitly would include a
prohibition against inducing others to bid for as well as
purchase any covered security.
2. Securities Excepted from Rule 101
16/ The definition of "distribution" for purposes of Rule 101
would be identical to that contained in Rule 10b-6.
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a. Securities with an ADTV Value of $1,000,000
or More
Commenters on the Concept Release supported the idea of
reducing restrictions on actively-traded foreign and U.S.
securities consistent with the principles of the Commission's
1993 Statement of Policy. 17/ After considering commenters
views and the Commission's experience with the Statement of
Policy, the Commission is proposing to exclude from Rule 101 all
securities with a published ADTV value of at least $1 million.
18/ Thus, proposed paragraph (c)(1) of Rule 101 would eliminate
the requirement of Rule 10b-6 that distribution participants and
their affiliated purchasers restrict market activities in these
securities and related securities. This action would enhance
significantly cross-border capital raising capabilities because,
for many foreign issuers, the trading practices rules have been
an impediment to offering their securities in the United States.
The Commission preliminarily believes that it is reasonable
to remove prophylactic trading restrictions for securities with a
minimum ADTV value of $1 million and to rely on market mechanisms
to curb manipulative activity. 19/ While the price of any
security can be manipulated, the Commission is of the view that,
as the value of trading volume of a security increases, it
becomes less likely that a distribution participant would be
able, cost-effectively, to affect the price of the security.
Actively-traded securities generally are followed widely by the
17/ See Securities Exchange Act Release No. 33137 (November 3,
1993), 58 FR 60324 ("Statement of Policy"). See also Letter
regarding Exemptions from Rules 10b-6, 10b-7, and 10b-8
During Distributions of Certain German Securities,
Securities Exchange Act Release No. 33022 (October 6, 1993),
58 FR 53220; Letter regarding Distributions of Certain
French Securities, Securities Exchange Act Release No. 34176
(June 7, 1994), 59 FR 31274; Letter regarding Exemptions
from Rules 10b-6, 10b-7, and 10b-8 During Distributions of
Certain United Kingdom Securities and Certain Securities
Traded on SEAQ International, Securities Exchange Act
Release No. 35234 (January 11, 1995), 60 FR 4644; Letter
regarding Exemptions from Rules 10b-6, 10b-7, and 10b-8
During Distributions of Certain Dutch Securities, Securities
Exchange Act Release No. 36412 (October 19, 1995), 60 FR
55391.
18/ A $5 million ADTV threshold was used in the Statement of
Policy as well as in the class exemptions issued thereunder
to identify very actively-traded securities. See supra note
17.
19/ See infra Section III.B.3.b. for a discussion of ADTV
generally.
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investment community, and aberrations in price are likely to be
observed and corrected quickly. Moreover, virtually all
actively-traded securities are traded on exchanges or other
organized markets with high levels of transparency and
surveillance. 20/
If adopted, it is estimated that the $1 million value of
ADTV threshold would remove from Rule 101 equity securities of
over 2,000 domestic issuers and a substantial number of foreign
securities. 21/ The Commission believes that this threshold
will except a large group of securities as to which the potential
for a successful manipulation is more limited. This will make it
easier for both foreign and domestic issuers to access the U.S.
capital markets, and will afford more opportunities for U.S.
investors.
The proposed exception would not compromise investor
protection because the general anti-fraud and anti-manipulation
provisions would continue to apply to offerings of these
securities. Those provisions would continue to prohibit
distribution participants and their affiliated purchasers from
influencing a security's price as a means to facilitate a
distribution.
Q2. Is the exception for actively-traded securities
appropriate? Is the ADTV threshold of $1 million appropriate?
Should the threshold be $5 million or some other level?
Commenters suggesting another threshold should provide reasons to
support their views.
Q3. Should transactions by distribution participants in
actively-traded securities be restricted for a brief period
(e.g., one or two hours) prior to pricing? Would such a
restricted period be feasible to implement?
In the case of distributions of certain actively-traded
foreign securities, the Commission has not applied Rule 10b-6 to
20/ The Commission expects that SROs will continue to enhance
their systems and procedures to capture improper trading
during distributions.
21/ Based on transaction information for 1994, approximately
1,051 securities listed on the New York Stock Exchange, Inc.
("NYSE"), 677 securities quoted on Nasdaq, and 30 securities
listed on the American Stock Exchange, Inc. ("AMEX") would
be excluded from the rule. In 1994, firm commitment public
offerings were conducted for 268 of these securities. The
general increase in security prices and trading volume since
year-end 1994 would increase the number of securities likely
to be excluded from the proposed rule.
==========================================START OF PAGE 15======
transactions in securities markets that have not represented a
significant proportion of activity in the security, i.e., where
the trading volume in a particular jurisdiction accounts for less
than 10% of the aggregate worldwide published trading volume in
the security ("non-significant markets"). 22/ The Commission is
not proposing an exclusion for transactions effected in non-
significant markets because the proposed exception for actively-
traded securities would permit transactions in those securities
without restriction. The concept of non-significant markets,
however, may be important if a brief restricted period were
required for actively-traded securities, or for those offerings
of foreign securities that are subject to Rule 101.
Q4. Should transactions effected in non-significant markets
be subject to restricted periods? How would non-significant
markets be defined (e.g., would the current test of less than 10%
of aggregate worldwide published trading volume suffice)?
Commenters favoring an exception for transactions in non-
significant markets should discuss the context where the
principal market is closed for trading.
Although the Commission is not proposing to include a
specific disclosure or recordkeeping requirement for transactions
in these securities by distribution participants, as contained in
exemptions issued pursuant to the Statement of Policy, the
Commission is proposing amendments to Regulations S-B and S-K
that would require disclosure of syndicate covering transactions
and penalty bids that could affect an offered security's price.
23/
Q5. Should the disclosure requirements referenced in the
Statement of Policy apply to transactions in actively-traded
securities excepted from Rule 101?
b. Investment Grade Nonconvertible Securities
Paragraph (c)(2) of Rule 101 generally would incorporate the
exception contained in Rule 10b-6(a)(4)(xiii), which excepts
nonconvertible debt securities and nonconvertible preferred
securities, if the nonconvertible securities being distributed
are rated investment grade by at least one nationally recognized
statistical rating organization ("NRSRO"). This exception is
based on the premise that these securities are traded on the
basis of their yields and credit ratings, rather than the
identity of the particular issuer, are largely fungible and,
22/ See supra note 17 (citing class exemptions).
23/ See infra Section III.E.5.
==========================================START OF PAGE 16======
therefore, are less likely to be subject to manipulation. 24/
Q6. Do investment grade asset-backed securities have the
same characteristics, including with respect to trading, as
nonconvertible investment grade debt securities of corporate
issuers? Should investment grade asset-backed securities be
excepted from Rule 101?
Q7. For purposes of Rule 101, should an exception for
nonconvertible investment grade debt or preferred securities be
based on criteria other than a rating by an NRSRO?
c. Exempted Securities
The Commission proposes to exclude from Rule 101 "exempted
securities," as defined in Section 3(a)(12) of the Exchange Act.
Rule 10b-6 provides an exception for these exempted securities,
and also specifically excludes securities that are issued, or
guaranteed as to principal and interest, by the International
Bank for Reconstruction and Development ("IBRD"). The Commission
believes that the exception for nonconvertible investment grade
debt makes it unnecessary to refer to securities of the IBRD, or
of any other entity, within the "exempted securities" exception.
d. Face-amount Securities or Securities Issued
by an Open-end Management Investment Company
or Unit Investment Trust
The Commission proposes to except from Rule 101 face-amount
certificates issued by a face-amount certificate company, or
redeemable securities issued by an open-end management investment
company or a unit investment trust pursuant to paragraph (c)(4)
of Rule 101. Paragraph (d) of Rule 10b-6 contains such an
exception.
3. Securities and Activities Covered by the Rule
a. Restricted Periods
In the Concept Release, the Commission requested comment on
whether the Rule 10b-6 cooling-off periods, and the criteria used
to determine such periods, should be revised. Nine commenters
addressed these issues. These commenters supported shortening
the cooling-off periods, asserting that the two and nine business
day periods no longer are justified, especially in light of
advances in the SROs' surveillance systems and enhanced market
transparency. A few commenters stated that the price and public
float criteria should be replaced and suggested tests based on
24/ Securities Exchange Release No. 19565 (March 4, 1983), 48 FR
10628, 10631-32 ("Release 34-19565").
==========================================START OF PAGE 17======
trading volume, market capitalization, or public float.
In Rule 10b-6, a security with a per share price of at least
$5.00 and a public float of at least 400,000 shares has a
cooling-off period of two business days, while all other
securities are subject to a nine business day cooling-off period.
The Commission adopted these criteria because a security's public
float provided a reasonable indication of the depth and liquidity
of the market for a security; a minimum share price criterion was
appropriate in light of the generally greater volatility of lower
priced stocks; and the criteria were easily ascertainable. 25/
In addition, a five business day cooling-off period applies to
the exercise of standardized call options that were acquired
after the person became a distribution participant.
For securities covered by Rule 101 (i.e., those with a
published ADTV value of less than $1,000,000), the Commission is
proposing to replace the existing cooling-off periods with two
shorter restricted periods:
i. for a security with a published ADTV value equal
to or exceeding $100,000, the restricted period
would begin on the later of one business day prior
to the determination of the price of the security
to be distributed, or such time that a person
becomes a distribution participant, and end upon
the completion of such person's participation in
the distribution of a security; 26/
ii. for all other securities, the restricted period would
begin on the later of five business days prior to the
determination of the price of the security to be
distributed, or such time that a person becomes a
distribution participant, and end upon the completion
of such person's participation in the distribution.
Accordingly, the proposed trading restrictions of Rule 101 focus
on a security's ADTV value, and the period immediately before the
offering is priced. This approach differs from the cooling-off
periods under Rule 10b-6, which are based on the price and public
float of a security and begin prior to the commencement of offers
and sales in the distribution.
The Commission believes that the proposed thresholds
25/ See Release 34-19565, 48 FR at 10634.
26/ The term "business day" would be defined in Rule 100 as a 24
hour period, determined with reference to the principal
market for the security to be distributed, that includes a
complete trading session for that market.
==========================================START OF PAGE 18======
effectively balance maintaining depth and liquidity in the
period immediately preceding pricing and protecting the integrity
of the market as an independent pricing mechanism. Many
securities now qualifying for a two business day cooling-off
period and some nine business day securities would have this
period reduced to one business day. For a large number of
securities, the nine business day period would be reduced to five
business days. The applicable period for some securities would
increase from two to five business days. 27/
Q8. Would the proposed restricted periods adequately
balance the goal of maintaining market liquidity with the mandate
to protect investors from manipulation? If not, should one hour
be used rather than one business day? Should two or nine
business days continue to be used rather than one and five
business days?
In some offerings, there is a lag between the time that the
securities are priced and the commencement of sales. For
example, in certain foreign offerings, the securities are priced,
then there is a subscription period for home-country residents,
after which international offers commence. Similarly, in the
case of an exchange offer or merger, the securities could be
priced some time before the exchange offer or proxy solicitation
period commences. In these offerings, as in other distributions,
the Commission believes that the restricted periods should apply
one or five business days prior to the pricing of the offering
and continue until distribution activities terminate. Thus,
there could be a period of time between pricing and the
commencement of offers and sales when market activity by
distribution participants and their affiliated purchasers would
be restricted by Rule 101.
Q9. Are there circumstances when the application of the
restricted periods should be modified? For example, should there
be a separate restricted period in the case of merger
transactions or exchange offers? Commenters should describe
situations where they believe that a restricted period based on
pricing may not be feasible.
b. The Use of a Test Based on ADTV
As indicated above, the basis for determining which
restricted period applies to a particular security would be
27/ Compared with the cooling-off periods under the current
rule, for 7,477 NYSE, AMEX, and Nasdaq securities,
approximately 24% will not be subject to Rule 101,
approximately 56% will have a shorter restricted period, and
approximately 20% will have a longer restricted period
(based on 1994 price and volume information).
==========================================START OF PAGE 19======
different from the test used for the cooling-off periods under
Rule 10b-6. Various measurements could be used to provide
relatively certain and easily determinable criteria for applying
the appropriate restricted period (e.g., ADTV value, the
security's price, an issuer's public float). For purposes of
Regulation M, the Commission believes that the value of a
security's ADTV is the most appropriate test because it provides
a more accurate indication of the depth and liquidity of the
trading market for a security than its price and public float.
For example, although an issuer may have a significant public
float, the dollar value of daily trading in its common stock may
be quite low.
The Commission proposes to define "average daily trading
volume" as the world-wide reported average daily trading volume
during the three full consecutive calendar months immediately
preceding either the date of the filing of the registration
statement, or if there is no registration statement or if the
distribution involves a shelf takedown, three full consecutive
calendar months immediately preceding the pricing. To determine
the value of the ADTV, it is proposed that the ADTV either be
multiplied by the security's price (in dollars) as of the last
business day of the most recent month, or calculated by using the
actual price and volume information for each day within the three
month period, if it is available.
Q10. Does the value of a security's ADTV provide the
appropriate standard on which to base the restricted periods?
Should a test based on the issuer's public float be used instead?
If so, should the thresholds be, for example, a $150 million
public float for the actively-traded securities exception; a
public float of $25-$150 million for the one business day
restricted period; and a public float of below $25 millon for the
five business day restricted period?
Q11. Is information on ADTV readily available to
participants in a distribution?
Q12. Should ADTV be based on a different measuring period,
e.g., 12 full calendar months, or a rolling three month (i.e., 90
day) period, rather than three full calendar months?
c. Derivative Securities
The Concept Release stated the Commission's view that anti-
manipulation regulation of securities offerings "should be
limited to securities whose prices may significantly affect the
market's evaluation of a security in distribution." 28/ Rule
10b-6(a)(4) applies to: (1) the security being distributed, (2)
28/ Concept Release, 59 FR at 21688.
==========================================START OF PAGE 20======
any security of the "same class and series" as that security, and
(3) "any right to purchase" any such security. In the case of
distributions of a security that is "immediately exchangeable for
or convertible into" another security, or that entitles the
holder immediately to acquire another security, Rule 10b-6(b)
also prohibits purchases of the other security.
The "right to purchase" and "same class and series" concepts
appear to be both too broad and too limited. The same class and
series language has been construed broadly to encompass similar
securities of an issuer even though there is no inherent
mathematical relationship between the prices of those securities.
29/
This has led to some complicated and not very clearly defined
distinctions in applying the rule to offerings of debt. On the
other hand, the right to purchase concept has been interpreted so
as not to reach securities that are not "immediately" convertible
into each other. These securities, however, trade with a price
relationship to the security in distribution because their
ultimate value is, or in the future may be, determined by the
value of the security into which they are exchangeable or
exercisable. 30/ The concept also does not encompass a wide
variety of securities that have been developed in recent years
whose value is or will be derived from another security, but that
do not give the holder the right to acquire that security. On
the other hand, Rule 10b-6 applies to transactions in derivative
securities, such as options and warrants, that are exchangeable
or exercisable for the security in distribution, but are not very
efficient vehicles to cause a price effect on the distribution
security.
The Commission is proposing to eliminate these two Rule 10b-
6 concepts, and to apply the trading restrictions of Rule 101 to
"covered securities," which would include the security in
distribution and "reference securities." A "reference security"
would be defined in Rule 100 as a security whose price is or will
be used to determine, in whole or in significant part, the price
of another security that is the subject of a distribution. 31/
In contrast, derivative securities related to the security
in distribution would not be covered by the rule. The Commission
29/ See Concept Release, 59 FR at 21688. See also Letter
regarding Gamble-Skogmo, Inc. (January 11, 1974).
30/ See Release 34-19565, 48 FR at 10634 n.28.
31/ Examples of securities that are not covered expressly by
Rule 10b-6, but would be covered by Rule 101 as reference
securities, include the underlying common stock during
distributions of "preferred equity redemption cumulative
stocks" ("PERCS") and "equity-linked notes" ("ELNS").
==========================================START OF PAGE 21======
believes that the manipulative potential of trades in a
derivative security for the purpose of affecting the price of an
underlying security is sufficiently attenuated such that these
securities should not be covered by Regulation M. Thus, for
example, bids or purchases of the underlying common stock (i.e.,
the reference security) would be restricted during a distribution
of a security exercisable or exchangeable for, or convertible
into, the common stock. On the other hand, bids or purchases of
any exercisable, exchangeable, or convertible security would not
be restricted during a distribution of the related common stock.
Many securities that under Rule 10b-6 are deemed by
interpretation to be of the same class and series as those
distributed, because of the similarities in their coupon rates,
maturity dates, and other provisions, would not be subject to
Rule 101. For example, Rule 101 would not apply to bids for and
purchases of nonconvertible debt or preferred securities of the
same issuer that are not identical in their principal features to
the securities being distributed. The Commission preliminarily
believes that the benefit of reducing compliance costs and
maintaining a normal trading market for these other securities
outweighs the possibility that bids for and purchases of such
securities could be used to facilitate a distribution. Rule 101
would apply, however, to transactions in securities that differ
from a security in distribution only as to the presence or
absence of voting rights.
Q13. Commenters are invited to discuss whether derivative
securities, i.e., those that derive all or part of their value
from a security in distribution, should be covered by Regulation
M.
Q14. Is there a more appropriate definition for a "reference
security?"
Q15. Should a security that could never contribute more than
5% of the value of another security not be deemed to be a
reference security for that security? If derivative securities
are covered by the rule, are there feasible means to identify
securities with a price relationship to a security in
distribution that is sufficiently attenuated that it should not
be covered by the rule? For example, should a derivative
security that derives less than 5% of its value from a security
in distribution be excluded?
4. Distributions
a. Definition of Distribution
In the Concept Release, the Commission sought comment on
whether to continue to define the term "distribution," and if so,
whether the term's definition should continue to be based on the
==========================================START OF PAGE 22======
"magnitude of the offering" and the presence of "special selling
efforts and selling methods." 32/ Commenters did not suggest
any changes to the definition or that it be eliminated from the
rule. Accordingly, the term "distribution" for purposes of
Regulation M is proposed to have the same meaning as in Rule 10b-
6. The Concept Release sought comment on whether certain types
of offerings, specifically, mergers and exchange offers, should
continue to be deemed distributions. Few comments, however, were
received on this issue. Thus, the Commission does not propose
excluding mergers and exchange offers from the definition of
distribution. 33/
Q16. Does the definition of distribution continue to be
appropriate?
b. Shelf Offerings
The Commission believes that it is useful to discuss the
proposed application of Rules 101 and 102 in the particular
context of shelf offerings. In 1983, the Commission permanently
adopted Rule 415, which, among other things, allows issuers and
selling shareholders to register securities for sale on a delayed
or continuous basis. 34/ Since the Commission last addressed
32/ A distribution is defined in Rule 10b-6(c)(5) as "an
offering of securities, whether or not subject to
registration under the Securities Act of 1933, that is
distinguished from ordinary trading transactions by the
magnitude of the offering and the presence of special
selling efforts and selling methods."
33/ The Commission is of the view that exchange offers and
mergers involving the issuance of securities, and related
shareholder election and valuation periods, should be
subject to Regulation M. See Georgia-Pacific Corporation,
SEC Litigation Release No. 3511, (May 23, 1966). See also
Release 34-19565, 48 FR at 10638 n.61.
Because the Commission is proposing to eliminate the "right
to purchase" concept, Rule 10b-6 restrictions on purchases
of most target company securities during an exchange offer
or a merger involving the issuance of securities would be
eliminated. Rule 10b-13 under the Exchange Act, however,
would continue to prohibit any purchases or arrangements to
purchase target securities, or a security immediately
convertible into or exchangeable for those securities, from
the time of public announcement until the expiration of a
tender or exchange offer. 17 CFR 240.10b-13.
34/ 17 CFR 230.415. Securities Exchange Act Release No. 20384
(November 17, 1983), 48 FR 52889.
==========================================START OF PAGE 23======
this issue, the methods by which shelf offerings are conducted
have changed, and the use of shelf registration has increased.
For example, "unallocated" shelf registration statements that
register a substantial amount of securities, but do not specify
the exact amounts of particular types of securities that may be
sold, have become more common. The Commission believes that it
is appropriate to reflect these developments in the treatment of
shelf offerings for purposes of proposed Rules 101 and 102.
Under a current Commission interpretation, "any shelf-
registered offering that constitutes a Rule 10b-6 distribution
should be considered a single distribution for purposes of the
rule." 35/ This means that once an issuer, or a selling
securityholder that is in a control relationship with the issuer,
determines to proceed with a shelf registered distribution, each
takedown off of the shelf is subject to Rule 10b-6 irrespective
of its individual magnitude. 36/ However, a selling
securityholder that is not an affiliated purchaser of the issuer
or of any other selling securityholder is subject to the
restrictions of Rule 10b-6 only with respect to offers or sales
of that individual securityholder's securities. 37/
In addition, under Rule 10b-6, the Commission has
distinguished between broker-dealers that have arrangements,
agreements, or understandings with issuers to sell all or a
portion of the securities being distributed off the shelf
("continuing agreements"), and those that do not. If a broker-
dealer has a continuing agreement with an issuer to sell, from
time to time, securities registered on the shelf, it is subject
to the full cooling-off period prior to any offer or sale off the
shelf. If a broker-dealer does not have a continuing agreement
with an issuer, and decides to submit a bid in response to an
issuer's solicitation of interest in purchasing its securities
for distribution, the broker-dealer is subject to the applicable
cooling-off period from the time that it decides to submit the
bid. 38/ If a broker-dealer submits an unsolicited bid, it is
not deemed to be a participant until the bid has been accepted or
35/ Release 34-19565, 48 FR at 10631. This has been known as
the "single distribution position."
36/ Id. See also Securities Exchange Act Release No. 23611
(September 11, 1986), 51 FR 33242, 33244 ("Release 34-
23611").
37/ Release 34-23611, 51 FR at 33244.
38/ See Release 34-19565, 48 FR at 10634.
==========================================START OF PAGE 24======
the broker-dealer has reason to believe that it will be accepted.
39/
Rather than applying the single distribution position, the
Commission would take a modified approach regarding the
application of Rule 101 to shelf distributions. 40/ Under the
Commission's proposed approach, rather than considering the
entire shelf to be a single distribution and applying the rule's
restricted periods to any offers or sales off the shelf, each
takedown would be examined individually in order to determine
whether such offering constitutes a distribution, i.e., whether
it satisfies the "magnitude" and "special selling efforts and
selling methods" criteria of a distribution. 41/
A broker-dealer participating in the offering of a shelf
tranche should determine whether it is participating in a
"distribution." To determine the magnitude of the offering for
purposes of Rule 101, the broker-dealer would have to assess the
amount of securities that it is, or foreseeably will be, asked to
sell. 42/ The broker-dealer also would need to analyze the
39/ See id. at 10635. See also infra Section III.B.5.b.
discussing the revised definition of "prospective
underwriter."
40/ The Commission's revised interpretation regarding shelf
offerings would apply to distribution participants, issuers,
and selling securityholders, and would modify previous
Commission interpretations regarding shelfs. See Release
34-23611, 51 FR at 33244-45.
41/ If a distribution participant (e.g., a broker-dealer) has
not entered into a continuing agreement with an issuer or
selling securityholder, and if the sales off the shelf
constitute a distribution, then the distribution participant
would be required to comply with Rule 101 from the later of
the applicable restricted period for the offered security,
or the time that such person becomes a distribution
participant. This interpretation reflects the speed with
which sales off a shelf frequently occur.
42/ If sales off a shelf by an issuer, or by any affiliated
purchaser of the issuer, constitute a distribution of
securities, the issuer and all issuer affiliated purchasers
would be subject to the applicable restricted period of Rule
102. Similarly, if any shelf securityholder is selling
securities off a shelf, and such sales constitute a
distribution, all other shelf securityholders who are
affiliated purchasers of the selling securityholder would be
subject to the applicable restricted period of Rule 102.
See Release 34-23611, 51 FR at 33245.
==========================================START OF PAGE 25======
selling efforts and selling methods that it will use. For
example, where a broker-dealer sells shares on behalf of an
issuer or selling securityholder in ordinary trading transactions
into an independent market, i.e., without any special selling
efforts, the broker-dealer is not subject to Rule 10b-6. 43/
Special selling efforts likely would be involved, however, where
a broker-dealer enters into a sales agency agreement that
provides that it will receive unusual transaction-based
compensation for the sales, even if the securities are sold in
ordinary trading transactions. An issuer's identification in a
shelf registration statement of a variety of potential selling
methods that could be used to sell registered securities off a
shelf (some of which would constitute "special selling efforts"),
however, would not, in itself, require a broker-dealer to
consider itself to be involved in a distribution unless special
selling efforts or methods were used by the broker-dealer in
connection with particular sales off the shelf. 44/
Q17. Should a broker-dealer that enters into a continuing
agreement regarding sales of all securities or a significant
amount of the shares on the shelf be viewed differently from one
whose participation is limited to a single takedown?
Q18. Are there other issues raised by the application of
Rule 101 to shelf offerings that the Commission should address?
5. Persons Subject to the Rule
a. Distribution Participant
The term "distribution participant" is proposed to be
defined in Rule 100 as an underwriter, prospective underwriter,
broker, dealer, or other person who has agreed to participate or
is participating in the distribution.
Q19. Does the proposed definition of distribution
participant adequately cover those persons, other than an issuer
or selling securityholder, who have a readily identifiable
43/ See Release 34-23611, 51 FR at 33247.
44/ Cf. Securities Exchange Act Release No. 18528 (March 3,
1982), 47 FR 11482, 11485 ("Release 34-18528"). Under
current interpretation, if a registrant, when disclosing its
proposed plan of distribution, reserves the right to utilize
techniques that might entail selling efforts or compensation
of the type normally associated with a distribution, the
Commission deems special selling efforts and selling methods
to be used throughout the shelf offering for purposes of
Rule 10b-6.
==========================================START OF PAGE 26======
incentive to manipulate the market during an offering? 45/
b. Prospective Underwriter
Commenters requested that the Commission provide greater
certainty as to when a person becomes a "prospective underwriter"
for purposes of Rule 10b-6. 46/ Commenters were concerned
especially with the application of this definition in the context
of shelf-registered distributions when a broker-dealer has
submitted a bid to purchase shelf-registered securities, but does
not know whether the bid will be accepted by the issuer or
selling securityholder. This uncertainty may exist in those
circumstances where bids are submitted to the issuer or selling
securityholder by a number of broker-dealers, or where the issuer
or selling securityholder solicits a bid from a broker-dealer,
but has not indicated an intention to offer shares off the shelf
or to select that particular broker-dealer as an underwriter.
The Commission believes that the definition of "prospective
underwriter" should reflect the principle that anti-manipulation
regulation should apply when there exists an incentive to
manipulate. 47/ In the Commission's view, a person has an
incentive to manipulate, and thus becomes a prospective
underwriter, when such person knows or reasonably expects that a
bid or proposal it has submitted to the issuer or selling
securityholder will be accepted, whether or not the
underwriting's terms and conditions have been agreed upon.
Moreover, a person who has received an invitation to participate
in an offering should be deemed a "prospective underwriter" from
the time that the person decides to participate, whether or not
that decision has been communicated to the issuer, selling
45/ See Concept Release, 59 FR at 21686.
46/ Rule 10b-6(c)(2) defines the term as:
a person (i) who has decided to submit a bid
to become an underwriter of securities as to
which the issuer or other person on whose
behalf the distribution is to be made, has
issued, directly or indirectly, an invitation
for bids, or (ii) who has reached an
understanding, with the issuer or other
person on whose behalf a distribution is to
be made, that he will become an underwriter,
whether or not the terms and conditions of
the underwriting have been agreed upon. 17
CFR 240.10b-6(c)(2).
47/ See Concept Release, 59 FR at 21686. See also Release 34-
19565, 48 FR at 10634-10635.
==========================================START OF PAGE 27======
securityholder, or managing underwriter.
Accordingly, Rule 100 would define "prospective underwriter"
as a person who: (i) has submitted a bid to the issuer or other
person on whose behalf the distribution is to be made, which such
person knows or reasonably expects will be accepted, whether or
not the terms and conditions of the underwriting have been agreed
upon; or (ii) has reached, or reasonably expects to reach, an
understanding with the issuer or selling shareholder, or with the
managing underwriter, that such person will become an
underwriter, whether or not the terms and conditions of such
person's participation have been agreed upon.
A broker-dealer would be subject to Rule 101 beginning with
the commencement of the restricted period or such later time as
the broker-dealer becomes an underwriter or prospective
underwriter. If the broker-dealer has a continuing agreement
with the issuer or selling securityholder, such firm would have
advance knowledge that the distribution will take place. Thus,
the broker-dealer would be required to observe the entire
restricted period prior to the pricing of the offered security
subject to that agreement. There may be other scenarios where a
broker-dealer does not have a continuing relationship with an
issuer, but would be in a position to have advance knowledge that
a takedown off a shelf will occur and that the broker-dealer will
participate in the distribution. Such broker-dealer also would
be required to observe the entire restricted period. This
position reflects the role that such broker-dealers generally
play in advising issuers and selling shareholders regarding the
timing of shelf offerings.
Q20. Does the proposed definition of prospective underwriter
provide sufficient flexibility and certainty to persons who
submit bids to become underwriters of securities?
c. Affiliated Purchaser
Certain persons who are not themselves distribution
participants have relationships with distribution participants
that raise concerns that they may have incentives to facilitate a
distribution through manipulative means. These persons are
referred to in Rule 10b-6 and in Regulation M as "affiliated
purchasers." Both Rule 10b-6 and Rule 100 include within this
term: (1) persons who act in concert with a distribution
participant in connection with the acquisition or distribution of
a security that is the subject of a distribution; or (2)
affiliates who control the purchase of such securities by a
distribution participant, or whose purchases are controlled by a
distribution participant, or whose purchases are under common
control with those of a distribution participant.
The Commission believes that Regulation M should reflect the
==========================================START OF PAGE 28======
structural complexity of multi-service financial organizations,
the administrative costs incurred by such entities in complying
with Rule 10b-6, and the precedents recognizing information
barriers as an element of exemptions from Rule 10b-6. 48/ The
Commission proposes that Rule 100 would exclude an affiliate of a
distribution participant from the coverage of Rule 101 if the
distribution participant establishes, maintains, enforces, and
reviews at least annually written policies and procedures to
separate its corporate finance activities conducted in connection
with a distribution from the trading operations of the affiliate
("information barriers") 49/ and the affiliate is a separate and
distinct organizational entity from, with no officers (or persons
performing similar functions) or employees (other than clerical,
ministerial, or support personnel) in common with, the
distribution participant. 50/
A distribution participant would be required to obtain an
independent review at least annually of its compliance during the
preceding year with the policies and procedures governing its
information barriers, including the operation and any breaches of
such barriers, and to report on the findings of such review to
its management. 51/ The distribution participant's internal
48/ See Securities Exchange Act Release No. 36033 (July 31,
1995), 60 FR 40212; Letter regarding CS Holding, [1995] Fed.
Sec. L. Rep. (CCH) 77,018 (March 31, 1995) ("CS Holding
Letter").
49/ The information barriers may be established pursuant to
separate regulatory requirements. See, e.g., 2 NYSE Guide
(CCH) 2098 (requiring that information barriers be
established that place substantial limits on access to, and
communication of, trading information, including strategies
and positions, between a specialist organization and an
affiliated entity); Broker-Dealer Policies and Procedures
Designed to Segment the Flow and Prevent the Misuse of
Material Nonpublic Information, Report by the Division of
Market Regulation to the Securities and Exchange Commission
(March 1990); Broker-Dealer Internal Control Procedures for
High Yield Securities, Report by the Division of Market
Regulation to the Securities and Exchange Commission
(October 1993).
50/ Distribution participants and their affiliates would not be
required to have separate compensation arrangements to
qualify for this exclusion. Cf. Rule 10b-6(c)(6)(i)(D)(2).
51/ Consistent with Rule 17a-4(b)(4) under the Exchange Act,
registered brokers and dealers would be required to maintain
and preserve the review for a period of not less than three
(continued...)
==========================================START OF PAGE 29======
audit group could perform the review if the group were
independent of the corporate financing and trading departments.
52/
Q21. Would this proposed definition appropriately narrow the
types of affiliates that should be deemed "affiliated
purchasers"?
Q22. Is it appropriate to rely on information barriers to
exclude certain affiliates of distribution participants from the
restrictions of Rule 101?
Q23. Can information barriers be established effectively
within the same organizational entity so as to preclude
opportunities to manipulate the price of a security that is the
subject of a distribution?
Q24. Should the independent annual review be conducted by an
external reviewer (such as an accounting firm)?
Q25. The requirement under Rule 10b-6 of no common
employees,
other than clerical, ministerial, or support personnel, would be
retained; however, the requirement of separate employee
compensation arrangements would be discontinued. Should the
separate employee compensation requirement be retained? Should
shared employees or officers be permitted?
Q26. How would this definition affect the operations of
distribution participants? Do they now conduct their corporate
finance activities in separate and distinct organizational
entities from their trading operations?
Q27. How would this definition affect investment advisers
and other non-broker-dealer fiduciaries?
Q28. How would this definition affect non-U.S. distribution
participants and their affiliates, including non-U.S. entities
that are permitted to engage in both commercial and investment
banking activities (e.g., universal banks)?
6. Activities Excepted From Rule 101: Paragraph (b)
a. Generally
51/(...continued)
years, the first two years in an accessible place. 17 CFR
240.17a-4(b)(4).
52/ See CS Holding Letter, supra note 48.
==========================================START OF PAGE 30======
As with Rule 10b-6, the Commission believes that certain
activities should be excepted from the prohibitions of proposed
Rule 101 because of the need to facilitate orderly distributions
of securities, or to limit potential disruptions in the trading
market, or because the activity has little manipulative
potential. The exceptions to Rule 10b-6 are prefaced with a
proviso that such activities are not prohibited if not "engaged
in for the purpose of creating actual, or apparent, active
trading in or raising the price of any such security." The
Commission does not propose to include this proviso in Rule 101
because it adds an element of complexity that does not appear to
be warranted in light of the new structure of Rule 101.
Activities permitted by Rule 101 would remain subject to the
general anti-fraud and anti-manipulation protections of the
Securities Act and Exchange Act.
b. Exception 1 - Research
Rule 10b-6 and Rule 101 prohibit any person participating in
a distribution from inducing others to purchase securities
covered by the rule. To reflect recent amendments to Securities
Act Rule 139, 53/ and to codify and expand the staff's
interpretations regarding research, Rule 101 would permit written
information, opinions, or recommendations that satisfy Rules 138
or 139 under the Securities Act to be published or disseminated
in the ordinary course of its business by a distribution
participant during the restricted period. 54/ The proposed
exception is intended to harmonize treatment of research under
Securities Act and Exchange Act rules.
Although research distributed in the ordinary course of
business that complies with Rules 138 or 139 would be excepted
from Rule 101, research transmitted by sales personnel to
customers who normally would not receive it in the ordinary
53/ Securities Act Release No. 7132 (February 1, 1995), 60 FR
6965.
54/ 17 CFR 230.138 and 230.139. The Commission's staff has
taken the position that certain research reports are not
prohibited inducements if they are issued by a broker-dealer
in the ordinary course of business and satisfy Rule 138 or
Rule 139(b) under the Securities Act, or satisfy Rule 139(a)
and do not contain a recommendation or earnings forecast
more favorable than that previously disseminated by the
firm. See Securities Exchange Act Release No. 21332
(September 19, 1984), 49 FR 37569, 37572 n.25. The current
interpretive limitations on more favorable earnings
forecasts or recommendations in research reports would not
be included in exception 1.
==========================================START OF PAGE 31======
course of business can constitute a solicitation to purchase.
55/ This directed research, or execution of orders resulting
from directed research, would not be permissible during the Rule
101 restricted period.
Q29. Should the circulation of offering materials and other
publications outside of the United States be excepted from Rule
101, as some commenters have suggested?
c. Exception 2 - Transactions Complying with
Certain Other Rules
Rule 101 would provide an exception for transactions
complying with Rules 103 or 104 of Regulation M (governing
passive market making and stabilization). This proposed
exception incorporates paragraphs (a)(4)(xiv) and (a)(4)(viii),
respectively, of Rule 10b-6.
d. Exception 3 - Odd-Lot Transactions
The Commission proposes to expand the exception for odd-lot
transactions contained in Rule 10b-6(a)(4) to permit distribution
participants to bid for and purchase odd-lots during the
restricted period.
e. Exception 4 - Exercises of Securities
The Commission proposes an exception to permit the exercise
of call options and other securities to acquire a covered
security. Many securities having associated standardized options
would not be subject to Rule 101 because of the proposed
exception for actively-traded securities, and other securities
underlying standardized call options generally would be subject
to the proposed one business day cooling-off period. These
changes, coupled with the unpredictability of the timing or the
extent of any purchases by parties who are exercised against,
would reduce significantly the likelihood that the exercise of
call options would be used to facilitate a distribution.
Therefore, the Commission proposes to eliminate the five business
day cooling-off period contained in Rule 10b-6 for the exercise
of standardized call options. Under proposed exception 4,
distribution participants would be permitted to exercise calľ
options duringuthe restricted pcriod, regardlesséof when the
optśons were acquire8.
The C˘mmission also pr|poses to except źxercises of opti|ns
┬ é
Ü
55/ DistrŇbution participnts also must onsider the bro@er-
dealer- registration re_uirements of S▄ction 15(a) of ŕhe
Exchangi Act and the rÄles thereunder in connection with
continuous distributions of research reports to investors.
15 U.S.C. 78o(a).
==========================================START OF PAGE 32======
or warrants, rights received in connection with a rights
offering, or rights or conversion privileges set forth in the
instrument governing a security to acquire any security directly
from an issuer. This would include exercises by distribution
participants of rights acquired during a distribution through
rights. Consistent with exception (vii) of Rule 10b-6, this
provision of Rule 101 is intended to permit exercises or
conversions of securities that do not entail any significant
market impact or manipulative potential, and thus do not involve
the concerns at which the anti-manipulation regulation of
securities distributions is directed.
Q30. Would any activity permitted by this exception raise
manipulative concerns because of a significant market impact?
f. Exception 5 - Unsolicited Brokerage
Transactions
The Commission proposes to include in Rule 101 the exception
for brokerage transactions not involving solicitation of the
customer's order that is contained in Rule 10b-6(a)(4)(v)(A).
g. Exception 6 - Basket Transactions
Commenters recommended that the Commission adopt some form
of relief for transactions effected as part of a basket strategy
if the basket is not used for manipulation. Basket trading
involves contemporaneous transactions in groups of securities
that often are related to a standardized index. The Commission
has granted Rule 10b-6 relief for standardized basket
transactions subject to certain conditions, including those
relating to the number of securities to be purchased, the
weighting of the distribution security in the basket, and the
timing of the basket transaction. 56/ Several commenters
supported expanding and streamlining the treatment of basket
transactions in view of the increasing importance of such
transactions to institutional investors, and the need of broker-
dealers to provide liquidity to these investors.
The Commission is proposing to include an exception for
purchases of covered securities made in connection with a basket
transaction. This exception would be available with respect to
both index-related baskets and baskets unrelated to any
standardized index. 57/ Proposed paragraph (b)(6) of Rule 101
56/ See Letter regarding Basket Trading During Distributions,
[1991] Fed. Sec. L. Rep. (CCH) 79,752 (August 6, 1991).
57/ As a practical matter, a high percentage of the securities
involved in basket transactions would be covered by the
proposed exception for actively-traded securities.
==========================================START OF PAGE 33======
would apply to transactions in covered securities when: (1) the
aggregate dollar value of any bids or purchases of the security
in distribution constitutes 5% or less of the total dollar value
of the basket being purchased; and (2) the basket contains at
least 20 stocks. The basket transaction also would have to be a
bona fide transaction effected in the ordinary course of business
(i.e., the decision to include the security in distribution in
the basket must be independent of the existence of the
distribution). The 5% and 20 stock criteria are intended to
provide an objective indication of the bona fide nature of a
basket transaction and to limit the exception to those basket
transactions where the security in distribution represents a
small portion of the basket, such that use of the basket
transaction to facilitate a distribution would not be economical.
These criteria also would provide flexibility for basket
transactions.
The exception also would permit bids and purchases for the
purpose of adjusting an existing basket position related to a
standardized index when made in the ordinary course of business
to the extent necessary to reflect a change in the composition of
the index. For example, a basket could be adjusted to reflect
substitutions of securities in a standardized index.
Q31. In view of the exception for actively-traded
securities, is this exception necessary?
Q32. Should the exception be unavailable in the last hour of
trading before the pricing of an offering because basket
transactions can involve significant amounts of stock and may
have an impact on the security's price? If a last-hour
restriction were imposed in this exception, would a further
relaxation of the 5% and 20 stock parameters be justified?
h. Exception 7 - De Minimis Transactions
Several commenters cited the consequences of "insignificant"
violations of Rule 10b-6 by a distribution participant,
particularly bids for, or small trades in, covered securities
effected during the cooling-off period. These violations have
resulted in the distribution participant dropping out of an
underwriting syndicate, or the postponement of the offering.
In the past, at a distribution participant's request, the
Commission's staff has taken informal no-action positions with
regard to the occurrence of such violations in cases where the
transactions were represented to be inadvertent and appeared to
have had no market impact. Frequently, these transgressions
occurred because of a failure to follow policies and procedures
established by the firm to comply with Rule 10b-6. Based on the
inadvertent nature of many of these violations and the lack of
market impact, coupled with the impact of such violations on
==========================================START OF PAGE 34======
distribution participants and offerings, some commenters
recommended that the Commission consider a safe harbor approach
for such activity that was not undertaken with a manipulative
purpose.
To address these concerns, the Commission is proposing an
exception to Rule 101 for certain de minimis transactions. A de
minimis transaction would be defined as a bid that was not
accepted, or one or more purchases that in the aggregate total
less than 1% of the security's ADTV. Because this proposed
exception is intended to cover "inadvertent" violations, and not
bids or purchases wilfully made in violation of the rule, it
would be available only when the firm had established and
enforced policies and procedures reasonably designed to achieve
compliance with Rule 101. Inadvertence also would be evidenced
by prompt cessation of the activity upon its discovery. 58/
Q33. Would this exception address the problems experienced
with respect to "inadvertent" violations under Rule 10b-6?
Q34. Is 1% of the security's ADTV the appropriate level to
be considered de minimis?
Q35. Would an alternative exception containing the 1% ADTV
threshold, but permitting bids and purchases whether or not in
violation of procedures, be preferable? In view of the
increased latitude that would be provided by this alternative,
the Commission believes that it may be necessary to make the
exception unavailable for transactions effected during the last
hour of trading prior to pricing the offering.
i. Exception 8 - Transactions in Connection with
the Distribution
A variety of transfers, allocations, and reallocations of
securities are necessary in the course of conducting a
distribution. These transactions should not be effected in a
manner that may affect the price of, or give an appearance of
trading activity in, covered securities. The Commission proposes
exception 8 to permit non-publicly reported transactions among
distribution participants to allocate and reallocate securities
among syndicate members in connection with a distribution, and
non-publicly reported purchases of securities from the issuer or
selling securityholders necessary to conduct the distribution.
58/ A firm's reliance on this exception on repeated occasions
would raise questions about the adequacy and effectiveness
of the firm's procedures. Therefore, upon the occurrence of
any violation, a broker-dealer would be expected to review
its policies and procedures and modify them as appropriate
to prevent future violations.
==========================================START OF PAGE 35======
Exception 8 is consistent with the objective of exception (i) of
Rule 10b-6, which permits transactions in connection with a
distribution that are effected otherwise than on a securities
exchange with the issuer or other person or persons on whose
behalf such distribution is being made, or among underwriters,
prospective underwriters, brokers, dealers, or other persons who
have agreed to participate or are participating in such
distribution. It reflects, however, the fact that many over-the-
counter ("OTC") transactions today are as transparent as exchange
transactions. Therefore, the proposed exception would apply only
to transactions among distribution participants, issuers, or
selling securityholders that are effected otherwise than on or
through the facilities of a securities exchange or an inter-
dealer quotation system (e.g., Nasdaq). Exception 8 also would
permit offers and sales of, and the solicitation of offers to
buy, the securities being distributed, including securities
acquired in stabilizing transactions, which are permitted under
exception (vi) of Rule 10b-6.
j. Exception 9 - Distributions of Rule 144A
Securities
Several commenters recommended expanding Rule 10b-6(i) which
excepts distributions of Rule 144A-eligible foreign securities if
the securities are sold solely to qualified institutional buyers
("QIBs") in transactions exempt from registration under the
Securities Act ("Rule 144A distributions"). 59/ After
considering the comments received, the Commission proposes to
expand this exception in proposed Rule 101 to include Rule 144A
distributions of domestic issuers' securities. In light of the
characteristics of transactions involving Rule 144A securities
(e.g., eligible securities are not listed on a U.S. exchange or
quoted on Nasdaq, and Rule 144A transactions are limited to
QIBs), the Commission has determined not to distinguish between
Rule 144A distributions of foreign and domestic securities. The
exception also would apply to a distribution of Rule 144A-
eligible securities to non-U.S. persons, within the meaning of
paragraphs (o)(2) and (o)(7) of Regulation S under the Securities
Act, that is made concurrently with a Rule 144A distribution to
QIBs. 60/
59/ See 17 CFR 230.144A.
60/ 17 CFR 230.902(o)(2) and 230.902(o)(7). This would codify
the position taken in Letter regarding Regulation S
Transactions during Distributions of Foreign Securities to
Qualified Institutional Buyers, [1993-1994] Fed. Sec. L.
Rep. (CCH) 76,851 (February 22, 1994), as modified by
Letter regarding Regulation S Transactions during
Distributions of Foreign Securities to Qualified
Institutional Buyers (March 9, 1995).
==========================================START OF PAGE 36======
The Commission notes that an exception from proposed Rule
101 based on the category of persons to whom the securities are
distributed may be viewed as a departure from the anti-
manipulation purposes of Regulation M, because no class of
investors, including large institutions, is immune to injury from
securities fraud or manipulation. 61/ However, based on the
ability of QIBs to obtain, consider, and analyze market
information, the Commission believes that it may be appropriate
to reduce the scope of Rule 101's prophylactic protections for
such market participants. Although some commenters recommended
expanding the exception to include offerings of Rule 144A-
eligible securities to institutional accredited investors in
addition to QIBs, the Commission is not adopting that
recommendation because it encompasses a much broader category of
investors, all of whom may not have comparable characteristics.
Q36. Is it appropriate to except certain distributions of
securities from Rule 101 based in part on the class of persons to
whom the securities are offered (e.g., QIBs)?
Q37. In light of the new exception for actively-traded
securities, which will except many distributions of Rule 144A-
eligible foreign securities from the rule, does an exception
expressly covering Rule 144A distributions continue to be
necessary or appropriate?
Q38. Do QIBs favor this exception and agree with its
rationale?
7. Rule 10b-6 Exceptions That Are Not Included in
Proposed Rule 101
a. Unsolicited Privately Negotiated Purchases
Rule 10b-6(a)(4)(ii) permits unsolicited privately
negotiated purchases, each involving at least a block of
securities, that are not effected from or through a broker or
dealer. This exception was adopted in response to industry
concerns regarding the need to permit issuers and distribution
participants to purchase blocks of securities "overhanging" the
61/ Cf. BT Securities Corporation, Securities Exchange Act
Release No. 35136 (December 22, 1994); In re Scientific
Control Corp. Sec. Litig., 71 F.R.D. 491, 512 (S.D.N.Y.
1976) (both sophisticated and unsophisticated investors are
entitled to protection from the disclosure and anti-fraud
provisions of the securities laws).
==========================================START OF PAGE 37======
market during a distribution. 62/
The staff's experience is that this provision is very seldom
utilized, and does not appear to be necessary to facilitate
orderly distributions. Therefore, and in light of the shortened
restricted periods and the proposed exception for unsolicited
brokerage transactions, the Commission is not proposing an
exception from the rule for privately negotiated, unsolicited
purchases of securities.
Q39. Does an exception for unsolicited privately negotiated
purchases continue to be necessary? If so, should there be any
requirements as to the size of the purchases (e.g., a block) or
whether the purchases were unsolicited? Should such an exception
be available for purchases by a broker-dealer?
b. Sinking Fund Obligations
Rule 10b-6(a)(4)(iii) provides an exception to permit an
issuer to satisfy its mandatory sinking fund obligations that
become due within 12 months from the date of purchase (i.e.,
those that are current). 63/ The Commission is of the view that
this exception no longer appears to be necessary and thus does
not propose to include within Rule 101 an exception for purchases
to satisfy sinking fund or similar obligations.
Q40. Is there any reason to retain this exception?
c. Rights Offerings
The Commission is of the view that Rule 10b-8 contains
overly rigid and complex restrictions on purchases of rights and,
unlike the other trading practices rules, regulates sales of the
offered security. These restrictions may no longer be necessary.
Rights offerings today generally are conducted in a manner
designed not to trigger Rule 10b-8's restrictions on purchases of
rights. The Commission proposes to rescind Rule 10b-8 to conform
62/ In 1983, the Commission deleted the requirement that
transactions effected in reliance on the exception not be
made on an exchange in recognition of the fact that both
third market and exchange transactions in reported
securities are reported to the consolidated transaction
reporting system ("consolidated system"). Release 34-19565,
48 FR at 10634. See also Release 34-18528, 47 FR at 11489.
63/ A sinking fund is a capital reserve set aside annually from
current earnings to provide funds to retire a particular
bond issue or debt security, in whole or in part, prior to
the security's maturity date. See Release 34-18528, 47 FR
at 11490 n.44.
==========================================START OF PAGE 38======
with Regulation M's treatment of derivative securities.
Therefore, bids and purchases of rights would not be covered by
Rule 101. Bids and purchases of the security that is the subject
of the rights offering, however, would be restricted by Rule 101.
Q41. Should the Commission continue to regulate rights
offerings through a separate rule?
Q42. Recently, a number of closed-end funds have conducted
rights offerings. Do rights offerings by closed-end funds
present any special manipulative concerns that should be
addressed by Regulation M?
8. Exemptive Authority
The Commission proposes to include within Rule 101 the
authority to grant exemptions from Rule 101. This provision is
similar to paragraph (j) of Rule 10b-6.
C. Rule 102 - Activities by Issuers and Selling
Securityholders
1. Generally
The Commission is proposing new Rule 102, which would govern
the activities of issuers, selling securityholders (i.e., any
person other than an issuer on whose behalf a distribution is
being made), and their affiliated purchasers in connection with a
distribution of securities. Rule 102 would make it unlawful for
such persons to bid for, purchase, or to attempt to induce any
person to bid for or purchase any security that is the subject of
such distribution and any reference security for such security
during the applicable restricted period.
Q43. Commenters should discuss whether an exception from the
definition of "affiliated purchaser" should be available to
affiliates of an issuer or selling securityholder who
establishes, maintains, and enforces written policies and
procedures regarding information barriers in compliance with Rule
100. Under what circumstances would issuers or selling
securityholders establish information barriers?
Q44. Should the rule provide more guidance as to how the
"affiliated purchaser" concept would apply where a distribution
participant (subject to Rule 101) is an affiliate of an issuer or
selling securityholder?
2. Excepted Securities
An issuer or selling shareholder may have a substantial
incentive to raise improperly the price of offered securities.
Also, issuer and shareholder transactions are not as readily
==========================================START OF PAGE 39======
identifiable from a surveillance perspective as those of
distribution participants. Thus, the Commission preliminarily
believes that it may not be appropriate to extend the exception
for actively-traded securities, or the exception for investment
grade debt and investment grade preferred securities provided in
Rule 101, to issuers, selling securityholders, or their
affiliated purchasers.
The Commission does propose, however, to provide an
exception from Rule 102 for "exempted securities," as defined in
Section 3(a)(12) of the Exchange Act, and face-amount securities
or securities issued by an open-end management investment company
or unit investment trust.
Q45. Should issuers be provided with an exception for
actively-traded securities? If so, are any new procedures
necessary to assist the exchanges or the NASD with surveillance
of issuer transactions in such securities?
Q46. Do issuers, selling securityholders, or their
affiliated purchasers rely on the exception for investment grade
debt securities in Rule 10b-6? If so, under what circumstances?
3. Excepted Activities
a. Generally
The Commission is proposing fewer exceptions from the
restrictions of Rule 102 than it is proposing in connection with
Rule 101. Rule 102 differs from Rule 101 because of the view
that issuers and selling securityholders have a direct and
immediate stake in the proceeds of offerings, and do not engage
in the same types of market activities as broker-dealers.
Moreover, SRO surveillance mechanisms can detect more quickly,
i.e., on a real-time basis, the market activities of their member
firms that are distribution participants, while transactions by
issuers and their affiliated purchasers are not as readily
identifiable.
b. Exception 1 - Odd-Lot Transactions
As with Rule 101, the Commission proposes to except from
Rule 102 bids for or purchases of securities in odd-lots. Among
other things, paragraph (b)(1) would permit issuers to conduct
odd-lot tender offers during the restricted period.
c. Exception 2 - Transactions Complying with
Rule 23c-3 of the Investment Company Act of
1940
Paragraph (b)(2) of Rule 102 would provide an exception for
repurchases of equity securities pursuant to Rule 23c-3 under the
==========================================START OF PAGE 40======
Investment Company Act of 1940. 64/
d. Exception 3 - Exercises of Securities
The Commission proposes to except from Rule 102 exercises of
call options and other securities and exercises of any right or
conversion privilege set forth in the instrument governing a
security, which provides for purchasing a security directly from
the issuer, including rights issued in a rights offering. This
provision is intended to permit affiliated purchasers of issuers
to exercise rights in connection with convertible, exchangeable,
or exercisable securities, including options received in
connection with employee benefit plans.
e. Exception 4 - Transactions in Connection with
the Distribution
Rule 102 would provide an exception for offers to sell or
the solicitation of offers to buy the securities being
distributed. This exception, which comports with Rule 10b-
6(a)(4)(vi), would permit an issuer or selling securityholder to
conduct the offering on its own behalf.
Q47. What is the impact on issuers of not providing for
other transactional exceptions, such as the exception for
unsolicited privately negotiated purchases or stabilizing
transactions? Do issuers or selling securityholders rely on
other exceptions in Rule 10b-6? If so, how often and for what
purpose? Persons urging additional exceptions for issuers should
provide reasons why they are warranted.
4. Plans
The Concept Release solicited comment on whether issuer
plans should be distinguished from other types of distributions
of securities, and whether plans should be distinguished based on
the nature of the participants, e.g., when the plan is available
only to certain groups having a relationship to the issuer. Rule
10b-6(e) excludes from the rule's coverage any distribution of
securities by an issuer or a subsidiary of the issuer to
64/ Rule 23c-3 under the Investment Company Act of 1940, 17 CFR
270.23c-3, permits periodic repurchases of common stock by
issuers that are registered closed-end investment companies
as well as business development companies.
==========================================START OF PAGE 41======
employees or securityholders of the issuer or its subsidiaries,
or to a trustee or other person acquiring such securities for the
account of such employees or securityholders pursuant to a
"plan," as defined in Rule 10b-6(c)(4). 65/
Many issuers, however, no longer limit participation in
their plans to securityholders or employees. Issuers have
extended plan participation to, among others, retirees, outside
directors, agents, consultants, suppliers, franchisees,
independent contractors, and family members of such persons, as
well as credit card holders and other customers. Moreover, some
plans permit prospective investors to participate by making an
initial cash payment, rather than requiring prior share
ownership. Issuer plans that allow participation by persons
other than their employees or securityholders, or those of their
subsidiaries, do not qualify for the exception.
The Division of Market Regulation, acting pursuant to
delegated authority, in 1994 granted a class exemption from Rule
10b-6 that facilitates investors' access to plans by permitting
investors to obtain their first share of an issuer's securities
directly from the issuer, and expands the availability of these
programs to persons other than the issuer's employees and
securityholders. 66/ Many issuers have relied on this exemption
in implementing dividend reinvestment and stock purchase plans.
The staff also recently has provided no-action relief from Rule
10b-6 for securities purchase and sale service programs offered
by bank-registered transfer agents. 67/ These actions appear to
65/ "Plan" is defined as "any bonus, profit-sharing, pension,
retirement, thrift, savings, incentive, stock purchase,
stock ownership, stock appreciation, stock option, dividend
reinvestment or similar plan for employees or shareholders
of an issuer or its subsidiaries." (emphasis supplied).
66/ See Securities Exchange Act Release No. 35041 (December 1,
1994), 59 FR 63393 ("1994 STA Letter"), as modified by
Letter regarding Dividend Reinvestment and Stock Purchase
Plans, [1995] Fed. Sec. L. Rep. (CCH) 77,110 (May 12,
1995). The 1994 STA Letter also provided the staff's views
on Sections 15(a) and 17A of the Exchange Act, 15 U.S.C.
78o(a) and 78q-1, respectively.
67/ See Letter regarding First Chicago Trust Company of New
York, [1994] Fed. Sec. L. Rep. (CCH) 76,939 (December 1,
1994); Letter regarding Bank-Sponsored Investor Services
Programs, [1995] Fed. Sec. L. Rep. (CCH) 77,122 (September
14, 1995) ("Bank-Sponsored Programs Letter"). These letters
also took no-action positions with regard to Section 5 of
the Securities Act, and Sections 13(e), 14(d), and 14(e) of,
(continued...)
==========================================START OF PAGE 42======
have addressed most of the concerns of the ten commenters who
discussed plans. Therefore, the Commission proposes to simplify
the treatment of plans under Rule 102 by codifying this relief
and further reducing the restrictions on plan transactions.
For purposes of Rule 102, plans would be divided into three
different groups: (1) plans that are available only to employees
and shareholders; (2) plans that are available to persons other
than employees and shareholders where securities for the plan are
purchased from a source other than the issuer or an affiliated
purchaser, i.e., in the open market or in privately negotiated
transactions, by an agent independent of the issuer; and (3)
plans that are available to persons other than employees and
shareholders where securities for the plan are purchased directly
from the issuer or an affiliated purchaser ("direct issuance
plans"). 68/
The Commission proposes to exclude from Rule 102 any
distribution pursuant to a plan by or on behalf of an issuer or a
subsidiary of an issuer, when such distribution is made solely to
employees or shareholders of the issuer or its subsidiaries, or
to a trustee or other person acquiring such securities for the
accounts of such person. This provision remains essentially
unchanged from Rule 10b-6(e). For purposes of this exception,
however, the term "employee" would have the same meaning as
contained in Form S-8 of the Securities Act relating to employee
benefit plans. 69/ Thus, distributions by plans that allow
directors, general partners, insurance agents, former employees,
consultants, and certain advisors to participate in their plans
are proposed to be excepted from Rule 102. This reflects the
view that persons that are not employees of an issuer or a
subsidiary of an issuer may have a relationship with an issuer
that is sufficiently similar to that of an employee such that it
67/(...continued)
and Rule 10b-13 under, the Exchange Act, 15 U.S.C. 77e,
78m(e), 78n(d), and 78n(e), and, in the case of the Bank-
Sponsored Programs Letter, Section 15(a) of the Exchange
Act.
68/ As provided by paragraph (g) of Rule 10b-6, the Commission
proposes to exclude from Rule 102 any bids or purchases of a
security made or effected by or for a plan by an "agent
independent of the issuer." See infra note 70 (discussing
the definition of "agent independent of the issuer").
69/ 17 CFR 239.16b. The definition of plan would be expanded to
include plans within the meaning of paragraph (c)(4) of Rule
10b-6 as well as dividend or interest reinvestment plans or
employee benefit plans, as defined in Rule 405 of Regulation
C. 17 CFR 230.405.
==========================================START OF PAGE 43======
is appropriate to treat such persons in the same manner as
employees for purposes of this exception. Further, this will
provide consistency between the Securities Act and the Exchange
Act regarding the types of issuer sponsored programs that are
considered to be plans.
Second, the Commission proposes to except all distributions
involving plans that include persons other than employees or
shareholders where purchases for the plan are made from sources
other than the issuer or an affiliated purchaser (i.e., in the
open market or in privately negotiated transactions) by an agent
independent of the issuer. The Commission believes that when an
agent independent of the issuer effects plan transactions, the
issuer's opportunity to engage in improper conduct is reduced
greatly. The Commission proposes to include the definition of
"agent independent of the issuer" in Rule 100, rather than
referring to the definition of that term presently in Rule 10b-
18(a)(6) under the Exchange Act. 70/ Except with respect to the
issuer's ability to change its determination once every three
months regarding the source of shares to fund a plan, an agent
would not be considered independent if the issuer directs the
agent as to the source of shares, or the timing of purchases of
shares (e.g., a requirement that shares to fund the plan must be
purchased on the plan's investment date). The issuer, however,
may establish general conditions for the operation of the plan,
including, for example, requirements with respect to the return
of uninvested funds to plan participants, and requirements that
optional cash payments be invested within 35 days of receipt.
71/
Third, the Commission proposes that a direct issuance plan
(i.e., a plan that is open to persons other than employees or
securityholders, and where shares are purchased from the issuer
or an affiliated purchaser) would be subject to Rule 102 when
offers and sales of securities pursuant to the plan constitute a
"distribution" within the meaning of Rule 100. Thus, the
"magnitude" and "special selling efforts and selling methods"
tests would be applied to offers and sales under such plan to
determine whether a distribution exists. In determining the
magnitude of an offering of plan shares, an issuer would need to
consider the amount of securities it distributes through the plan
70/ 17 CFR 240.10b-18(a)(6). The definition of "agent
independent of the issuer" would be substantially the same
as under paragraph (a)(6) of Rule 10b-18. It also is
proposed that Rule 10b-18 be amended to refer to the
definition in proposed Rule 100.
71/ See 1994 STA Letter, supra note 66 (modifying Letter
regarding Lucky Stores Inc., [1974-1975] Fed. Sec. L. Rep.
(CCH) 79,903 (June 5, 1974)).
==========================================START OF PAGE 44======
directly and indirectly (e.g., by broker-dealers who obtain
securities from the issuer as participants in a plan by virtue of
being securityholders and then distribute the shares to the
public). In determining whether special selling efforts or
selling methods are involved, for purposes of a plan, selling
efforts consistent with the solicitation activities permitted in
the 1994 STA Letter would be presumed not to involve special
selling efforts and selling methods for purposes of determining
the existence of a distribution. The treatment of direct
issuance plans under Regulation M recognizes that these plans
potentially can be capital raising transactions analogous to the
types distributions that historically have been subject to Rule
10b-6.
These proposed changes are intended to reduce significantly
and, in most cases, eliminate the rule's application to issuer
plans. Of course, issuers that employ their plans for
manipulative purposes would continue to be subject to the anti-
fraud and anti-manipulation provisions of the federal securities
laws. 72/
Q48. Do these proposals strike the appropriate balance? Are
any manipulative incentives raised by plan distributions?
Q49. Is it appropriate to distinguish plans available only
to employees and securityholders from other plans for purposes of
this rule? Is it appropriate to distinguish direct issuance
plans from other plans for purposes of this rule?
5. Exemptive Authority
The Commission proposes to include within Rule 101 the
authority to grant exemptions from Rule 101. This provision is
similar to paragraph (j) of Rule 10b-6.
6. Rule 10b-18
Rule 10b-18 provides that the issuer and its affiliated
purchasers will not incur liability under the anti-manipulation
provisions of Sections 9(a)(2) or 10(b) of the Exchange Act or
Rule 10b-5 thereunder, if purchases of the issuer's common stock
are effected in compliance with the conditions contained in that
rule relating to the time, price, volume, and manner of purchases
72/ In addition, to avoid broker-dealer registration under
Section 15(a) of the Exchange Act, an issuer operating a
plan must limit its activities in accordance with the
conditions set forth in the 1994 STA Letter. For example,
the issuer may perform only purely clerical and ministerial
functions, including forwarding cash and securities to an
independent broker-dealer or bank, in connection with the
plan.
==========================================START OF PAGE 45======
of the issuer's common stock. 73/ The Commission does not
believe that a safe harbor should be available in circumstances
that raise reasonably identifiable manipulative incentives.
Accordingly, in light of the special incentives that an issuer
and its affiliated purchasers may have in facilitating sales of
the issuer's securities that are the subject of a distribution,
the Commission is proposing to revise the definition of a "Rule
10b-18 purchase" to clarify that the safe harbor is not available
during a distribution of the issuer's common stock that is
subject to Rule 102, or during a distribution for which such
stock is a reference security. 74/ Under the proposals, the
Rule 10b-18 safe harbor would be unavailable during the entire
course of the distribution, and not only during the applicable
restricted period. The proposed amendment would codify an
informal staff interpretation and more clearly define the
parameters of the Rule 10b-18 safe harbor.
As noted earlier in the discussion of the treatment of shelf
offerings as distributions for purposes of Regulation M, the
Commission is of the view that generally each takedown off a
shelf should be examined individually to determine whether it
constitutes a distribution for purposes of Rule 100.
Accordingly, if the issuer determines to go forward with a
distribution of common stock pursuant to a shelf registration
statement, the Rule 10b-18 safe harbor would be unavailable from
the time of that determination until sales pursuant to the
takedown are completed.
Q50. Will the proposed revision to the definition of "Rule
10b-18 purchase" have any significant impact on issuers'
repurchase programs? Commenters that believe that there will be
an impact should describe how such programs will be affected.
D. Rule 103 - Passive Market Making
1. Discussion of Rule 103
Proposed Rule 103 would replace Rule 10b-6A, which was
adopted in 1993. 75/ Rule 103 would permit "passive market
making" in connection with the distribution of securities quoted
on Nasdaq during the restricted periods of Regulation M, when
73/ 17 CFR 240.10b-18.
74/ See 17 CFR 240.10b-18(a)(3). The Commission notes that
although the Rule 10b-18 safe harbor would not be available,
this does not mean that such purchases necessarily would
violate Sections 9(a)(2) or 10(b), or Rule 10b-5.
75/ Securities Exchange Act Release No. 32117 (April 8, 1993),
58 FR 19598 ("Release 34-32117").
==========================================START OF PAGE 46======
proposed Rule 101 otherwise would prohibit such transactions.
The purpose of the proposed rule (and Rule 10b-6A) is to
alleviate special liquidity problems that may exist in the Nasdaq
market during the restricted period, when distribution
participants or their affiliates that are Nasdaq market makers
otherwise must withdraw from the market. In general, exchange-
traded securities are not similarly affected because independent
specialists are assigned to provide depth and liquidity in listed
securities.
Rule 103 would incorporate many provisions of Rule 10b-6A.
Rule 103 generally would limit a passive market maker's bids and
purchases to the highest current independent bid, i.e., a bid of
a Nasdaq market maker that is not participating in the
distribution. Additionally, the rule would limit the amount of
purchases that each passive market maker could make and the
displayed size of the bid, and contain requirements relating to
identification, notification, and disclosure of passive market
making.
Several commenters and others experienced with Rule 10b-6A
have suggested allowing Nasdaq market making in a greater number
of contexts than is permitted under the current criteria. Rule
10b-6A defines an "eligible security" as a Nasdaq security that:
(1) is the subject of a firm commitment, fixed price offering
registered under the Securities Act or is a related security; (2)
has a minimum price of $5.00 per share and a minimum public float
of 400,000 shares; and (3) has Nasdaq market makers that are
underwriters or prospective underwriters, or affiliated
purchasers of underwriters or prospective underwriters, that
account for at least 30% of the total trading volume in such
security. 76/ These eligibility criteria were designed to limit
the availability of passive market making to those firm
commitment offerings of securities qualifying for the two
business day cooling-off period of Rule 10b-6, when the
restrictions of that rule otherwise would have reduced market
making capacity significantly.
The Commission believes that eliminating the rule's
eligibility criteria, thereby permitting passive market making in
a greater number of contexts, is consistent with the purposes of
Regulation M. Rule 103 would eliminate almost all of the
eligibility criteria contained in Rule 10b-6A(b)(3). The
Commission no longer considers it necessary to restrict passive
market making to the class of offerings where the potential
76/ See 17 CFR 240.10b-6A(b)(3).
==========================================START OF PAGE 47======
liquidity loss may be substantial. Under the proposals, however,
best efforts and at the market offerings would remain ineligible
for passive market making. 77/
Rule 103 also would extend the period when passive market
making is permitted, and increase the number of eligible
securities. Rule 10b-6A restricts passive market making to the
two business day cooling-off period, and prohibits passive market
making upon the commencement of offers and sales or when
stabilization commences. The new rule would permit passive
market making throughout the applicable restricted period, but
would continue to prohibit passive market making when
stabilization is being conducted. Under the proposals, all
Nasdaq securities would qualify for passive market making. The
rule also would permit passive market making in Nasdaq reference
securities (e.g., the underlying common stock during a
distribution of a convertible security).
In addition, passive market makers could bid for one round
lot of securities if their initial or remaining net purchasing
capacity is between one and 99 shares. This provision would
permit more syndicate members to be passive market makers and
also would respond to commenters who suggested greater
flexibility for passive market making.
To provide flexibility in the operation of passive market
making, a market maker is not required to lower its quotation to
reflect lower independent bids until it purchases an amount equal
to five times the maximum order size for the particular security,
as provided for under the NASD's rules for the Small Order
Execution System ("SOES"). In order to account for possible
changes to Nasdaq operations, the Commission proposes to allow a
passive market maker to purchase an amount that equals or exceeds
two times the minimum quotation size for the security as
determined by the NASD, before it is required to lower its
quotations to reflect lowered independent bids. 78/ Moreover,
passive market makers facilitating the execution of customer
orders would be able to make bids or purchases at a price above
the independent price where necessary to comply with any
Commission or NASD rule relating to the execution of customer
77/ The Commission previously has noted that the NASD
surveillance system does not easily accommodate at the
market offerings. Release 34-32117, 58 FR at 19600. The
Commission notes that the NASD's surveillance of passive
market making is an essential consideration in the proposal
to expand the contexts in which passive market making would
be permitted.
78/ See, e.g., Securities Exchange Act Release No. 36548
(December 1, 1995), 60 FR 63092.
==========================================START OF PAGE 48======
orders. 79/
Q51. Are the proposals to delete the requirements of the
definition of "eligible security" in Rule 10b-6A appropriate? Is
it appropriate to extend passive market making to Nasdaq
securities with an ADTV value under $100,000?
Q52. Would the provision permitting passive market making
for at least one round lot of a security assist Nasdaq market
makers whose trading volumes are insufficient to qualify for
passive market making? Is some other minimum purchase limitation
appropriate, e.g., two round lots or five round lots?
2. Postponement of Further Changes
The Commission is not proposing to make other revisions to
passive market making regulation at this time because proposed
Rule 101 would eliminate the need for passive market making for
many actively-traded Nasdaq securities and would allow passive
market making in many more contexts than permitted currently.
Moreover, the Commission is aware that there have been a
significant number of failures to comply with basic requirements
of passive market making (i.e., bid and purchase prices have
exceeded the highest independent bid, and purchases have exceeded
the rule's net purchase limitation). These incidents, along with
the expansion of passive market making to cover more offerings
and securities, suggest that it would be appropriate for the
Commission to continue to monitor passive market making before
proposing further changes. The Commission, however, intends to
review passive market making under Rule 103, if adopted, and will
consider other appropriate modifications.
Q53. In view of the compliance difficulties associated with
Rule 10b-6A, are there any structural changes that could help to
eliminate these problems, other than revisions to the rule's
price and volume limitations?
Q54. Net purchases by a passive market maker are limited to
30% of its Nasdaq ADTV. Is this 30% Nasdaq ADTV limitation
adequate to allow passive market making, particularly in light of
the elimination of the provisions for SOES transactions, or
should this threshold be revised, e.g., by permitting net
purchases of 50% of a market maker's Nasdaq ADTV?
E. Rule 104 - Stabilization and Other Syndicate Activities
1. Background
79/ See Letter regarding Obligations of Passive Market Makers
that Hold Customer Limit Orders, [1995] Fed. Sec. L. Rep.
(CCH) 77,040 (July 19, 1995).
==========================================START OF PAGE 49======
The Commission is proposing new Rule 104 to govern
stabilization. It would create a more flexible framework for
managing the distribution process and eliminate much of the
complexity in the operation of Rule 10b-7. 80/ The Commission
believes that stabilization should continue to be regulated
because it is market activity during an offering that is intended
to influence a security's price. 81/
Rule 104 would reflect the significant changes that have
occurred in underwriting methods since Rule 10b-7 was adopted.
For example, underwriters have developed highly effective means
of quickly placing and controlling an offering through the book-
building and allocation processes. Stabilization pursuant to
Rule 10b-7 has become less common, perhaps in part because of the
rule's limitations on increasing stabilizing bids, but also
because of the development of efficient distribution methods and
underwriters' concern that stabilization may indicate that an
offering is progressing poorly. Nevertheless, underwriters
continue to disclose in prospectuses that they reserve the right
to stabilize an offering, and stabilization remains an important
option in domestic and foreign contexts.
In their responses to the Concept Release, commenters
recognized the importance of regulating stabilization, but were
critical of Rule 10b-7's price restrictions, which prevent
underwriters from adjusting stabilizing bids to reflect
fluctuating markets and currency changes, and of the rule's
reliance on U.S. markets to govern permissible stabilizing
prices. Rule 104 reflects a fundamental shift from Rule 10b-7's
structure, while codifying exemptive and no-action relief issued
by the Commission and its staff within the last decade,
particularly with respect to cross-border transactions.
2. Stabilizing Levels
The most significant proposed changes from Rule 10b-7
pertain to permissible stabilizing price levels. The Commission
believes that these changes would afford greater flexibility to
80/ In addition to comments responding to the Concept Release,
the proposed new rule is based on comments received in
response to the 1991 Proposals. See supra note 15. The
1991 Proposals chiefly were intended to accommodate the
increasing internationalization of securities markets and
would be superseded by Regulation M. Therefore, they would
be withdrawn if Regulation M is adopted.
81/ See Section 9(a)(6) of the Exchange Act, 15 U.S.C.
78i(a)(6); Concept Release, 59 FR at 21689. See also the
Commission's 1940 policy statement on stabilizing,
Securities Exchange Act Release No. 2446 (March 18, 1940).
==========================================START OF PAGE 50======
underwriters, which is especially important in the context of
multinational securities offerings. Under Rule 10b-7, an
underwriter generally must set its stabilizing bid based on the
independent market price for the security, and cannot change that
bid except in limited circumstances. In principal markets that
are exchanges, initiation of stabilizing bids is limited by last
sale prices. In other markets, independent bids are the
reference price.
Rule 104 would allow persons effecting stabilizing
transactions to establish a stabilizing bid with reference to
prices in the principal market for the security, wherever
located, 82/ and then to maintain, reduce, or raise that bid to
follow the independent market, as long as the bid does not exceed
the highest independent bid and in no case exceeds the offering
price of the security. 83/ These provisions would provide
significant flexibility to stabilization regulation, because they
effectively would permit the stabilizing bid to follow the
independent market for the security, limited by the offering
price.
When the principal market is open, stabilizing price levels
would be determined by the stabilizing bid in that market, and if
there is no stabilizing bid, by the highest independent bid price
in that market. If the principal market is closed and
stabilizing has not been initiated in any market, no stabilizing
could be effected at a price in excess of the lower of: (1) the
price at which stabilizing could have been effected in the
principal market at the close thereof; or (2) the most current
reported price at which transactions in the offered security have
been effected on any exchange or inter-dealer quotation system
after the close of the principal market. After the opening of
quotations or trading in the market where stabilizing will be
effected, stabilizing could not be effected at a price higher
than the highest independent bid price for such security reported
in that market at the time such stabilizing is effected. Where
an independent market for the offered security does not exists,
stabilizing would be limited only by the offering price. Rule
104 also provides for adjustments to the stabilizing bid when the
82/ A U.S. market that is not the principal market would no
longer control stabilizing price levels. The reference
prices in the principal market must be reported pursuant to
Rule 11Aa3-1 under the Exchange Act, 17 CFR 240.11Aa3-1, or
be reported to a foreign financial regulatory authority as
defined in Section 3(a)(52) of the Exchange Act, 15 U.S.C.
78c(a)(52).
83/ Rule 100 would define "independent bid" as a bid by a person
who is not a distribution participant, issuer, selling
securityholder, or affiliated purchaser.
==========================================START OF PAGE 51======
security being stabilized goes ex-dividend, ex-rights, or ex-
distribution, or is expressed in a currency other than the
currency of the principal market and there are changes in the
exchange rate between the two currencies. 84/
Q55. Do the provisions regarding stabilizing price levels
create an effective framework to govern stabilizing transactions?
Do the provisions regarding stabilizing price levels present any
manipulative concerns?
3. Other Provisions Relating to Stabilization
As under Rule 10b-7, Rule 104 would provide that no person
may effect either alone or with others any stabilizing
transaction to facilitate an offering of any security in
contravention of its provisions. 85/ The term "stabilizing"
would be defined in Rule 100 as the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing, or
otherwise maintaining the price of a security. Rule 104 would
retain provisions governing priority of independent bids, control
and purpose of stabilizing, stabilizing at prices resulting from
unlawful activity, and the prohibition of stabilization in "at
the market" offerings. The Commission proposes to eliminate the
distinction in Rule 10b-7 between exchange-traded and OTC
securities. Rule 104 would retain the exclusion for "excepted
securities." The Commission also proposes to expand the
exception in Rule 10b-7 for distributions of Rule 144A-eligible
foreign securities made solely to QIBs in exempt transactions.
Rule 104 would except all distributions of Rule 144A-eligible
securities to QIBs, and sales of Rule 144-eligible securities to
non-U.S. persons, within the meaning of Regulation S under the
Securities Act, that are made concurrently with Rule 144A
distributions to QIBs. This responds to commenters who argued
that as a matter of consistency, the exception for Rule 144A-
84/ Rule 100 would define "current exchange rate" as the current
rate of exchange between two currencies, which is obtained
from at least one independent entity that provides foreign
exchange quotations and information in the ordinary course
of its business.
Rule 104(g)(5) would retain Rule 10b-7's provisions that any
stabilizing price that otherwise meets the requirements of
the rule need not be adjusted to reflect special prices
available to any group or class of persons (including
employees or holders of warrants or rights). See 17 CFR
240.10b-7(h), (i), (j)(5), and (j)(7).
85/ Unlike proposed Rules 101 and 102, which would apply to a
"distribution," Rule 104 would govern stabilizing to
facilitate an "offering," a term that is broader in scope.
==========================================START OF PAGE 52======
eligible securities should be extended to the domestic context.
Rule 104 would eliminate the provision pertaining to
limitation of liability. The Commission believes that lead
managers now exert considerably more control over stabilizing
transactions than when Rule 10b-7 was adopted, and that a
provision regarding vicarious liability arising out of
stabilizing transactions by syndicate members no longer appears
necessary.
Q56. Does Rule 104 cover all situations where underwriters
believe that stabilizing would be appropriate to facilitate an
offering? Would the rule's greater flexibility result in
stabilizing by underwriters in a greater number of instances?
Q57. In addition to "at the market" offerings, are there
other categories of offerings (e.g., best efforts) or securities
(e.g., penny stocks) for which stabilizing is not appropriate?
Should issuers be permitted to stabilize and, if so, under what
circumstances?
Q58. Is it appropriate to except from an anti-manipulation
provision stabilization of offerings of Rule 144A-eligible
securities?
Q59. Should the Commission retain the provision in Rule 10b-
7(m) regarding limitation of liability? What purpose does this
paragraph serve? If it should be retained, should it be in the
same form as the current provision?
4. Aftermarket Activities
An underwriter's interest in the success of an offering does
not necessarily end with the completion of the sales efforts and
termination of formal stabilizing activities, but can extend into
the "aftermarket" trading in the distributed security (in
general, the period immediately following the termination of
formal syndicate activity -- the so-called "breaking of the
syndicate"). Aftermarket participation may be an expected part
of the underwriting services provided to an issuer, and the
anticipated quality of such services can influence the issuer's
selection of a managing underwriter. Underwriters also have an
incentive to provide "support" in the aftermarket to
counterbalance pressure on the security's price from "flipping"
and other selling activity that could adversely affect the
investors who have purchased in the offering. In addition, the
managing underwriter often purchases shares in the aftermarket
==========================================START OF PAGE 53======
period to cover a syndicate short position. 86/ Accordingly,
the point in time when underwriters no longer have the purpose to
"facilitate an offering" cannot be identified with precision.
Furthermore, in initial public offerings the agreement among
underwriters may contain a provision authorizing the managing
underwriter to invoke a "penalty bid." This is a contractual
agreement permitting the managing underwriter to reclaim the
selling concession accruing to a syndicate participant with
respect to shares that the managing underwriter purchases in the
aftermarket to cover the syndicate short position. 87/ One of
the primary objectives of a penalty bid is to encourage syndicate
participants to sell the securities to those persons who intend
to hold them rather than to engage in short-term profit-taking,
i.e., to combat flipping. Enforcement of penalty bids typically
continues for as long as 30 days.
The Commission believes that the aftermarket activities
described above are not uncommon and may act to support the price
of the offered security in the aftermarket. 88/ Commenters,
however, were divided concerning whether regulation should be
extended to cover such activities. Therefore, the Commission at
this time is not proposing to extend the price limitations of
Rule 104 to cover aftermarket activities. Instead, as described
in the following section, the Commission is proposing to require
disclosure of syndicate covering and penalty bid activities, and
that underwriters keep records of such activities. Disclosure of
these aftermarket activities would serve to apprise regulators of
their possible market effects, while the recordkeeping
requirements would assist the Commission in monitoring
aftermarket practices and in assessing whether further regulation
is warranted.
86/ Underwriters frequently receive an overallotment option
(commonly referred to as the "Green Shoe" option), which is
the right, but not the obligation, to purchase securities
from the issuer in addition to those initially underwritten
by the syndicate, which may constitute up to 15% of the
initial underwritten amount. Because the overallotment
option may be insufficient to cover the entire syndicate
short position, that portion in excess of the overallotment
option must be covered through purchases in the secondary
market.
87/ Penalty bids are governed by Schedule D of the NASD's By-
Laws, Part V, Section 3, NASD Manual (CCH) 1820.
88/ See J. Shayne & L. Soderquist, Inefficiency in the Market
for Initial Public Offerings, 48 Vand. L. Rev. 965, 983-84
(May 1995).
==========================================START OF PAGE 54======
5. Disclosure and Recordkeeping
The Commission proposes to require more specific disclosure
of stabilization, syndicate covering transactions, 89/ and
penalty bids 90/ in order to make disclosure of these activities
more meaningful.
Like Rule 10b-7, paragraph (h) of Rule 104 would require any
person who places or transmits a bid that such person knows is
for the purpose of stabilizing the price of any security to
notify the market on which the transaction is effected, and to
disclose the purpose of such transaction to the person to whom
the bid is placed or is transmitted (e.g., the specialist or the
executing broker-dealer). The NASD requires persons intending to
initiate stabilization to provide it with prior notification.
91/ Stabilizing bids are then identified by a symbol on the
Nasdaq quotation display. In this way, the person engaged in
stabilization satisfies the requirement to inform the market and
the recipients of the purpose of a bid by notifying the NASD.
The exchanges, however, do not have this procedure. To fulfill
the proposed requirements for stabilizing transactions on an
exchange, underwriters would have to notify the exchange and
provide disclosure separately to recipients of the bid. In the
Commission's view, contemporaneous disclosure of the fact that
stabilizing is occurring is beneficial to the market and its
participants.
Rule 104 also would require any person effecting a syndicate
covering transaction, or placing or transmitting a penalty bid,
to disclose that fact to the SRO that has direct oversight
authority over the market on which the syndicate covering
transaction is effected, or the penalty bid is placed. This
information would be helpful to the exchanges and Nasdaq in
carrying out their surveillance responsibilities.
The stabilizing legend required by Rule 10b-7(k), and Item
89/ Rule 100 would define "syndicate covering transaction" as
the placing of any bid or the effecting of any purchase on
behalf of the sole distributor or the underwriting syndicate
or group to reduce a syndicate short position.
90/ Rule 100 would define "penalty bid" to mean an arrangement
that permits the managing underwriter to reclaim a selling
concession otherwise accruing to a syndicate member in
connection with an offering when the securities originally
sold by the syndicate member are purchased in syndicate
covering transactions.
91/ See Schedule D of the NASD's By-laws, Part V, Section 3(c),
NASD Manual (CCH) 1820.
==========================================START OF PAGE 55======
502(d) of Regulations S-B and S-K, 92/ would be replaced by a
brief legend identifying activity that may affect the offered
security's price and directing investors to a discussion in the
"plan of distribution" section of the prospectus. Item 508 of
Regulations S-B and S-K, 93/ governing the plan of distribution
disclosure, would be revised to require a brief description of
any prospective stabilizing and aftermarket activities, including
syndicate covering transactions and the imposition of a penalty
bid, and their potential effects on the market price. The
objective of these proposals is to augment the language found in
the stabilizing legend with more meaningful information regarding
stabilizing and related activities. 94/
Q60. Is regulation of aftermarket transactions warranted?
For example, should syndicate covering transactions be subject to
the price level restrictions of Rule 104? Should penalty bids be
prohibited as some commenters have suggested?
Q61. Would there be any difficulty in disclosing to the SRO
the fact that syndicate covering transactions are occurring or
that a penalty bid is in place?
Proposed amendments to Rule 17a-2 under the Exchange Act
would require managing underwriters to keep records of syndicate
covering transactions and penalty bids, in addition to
stabilizing information. Records would reflect the name and
class of securities, and the price, the date, and the time for
each syndicate covering transaction. The records also would
reflect the dates that any penalty bid was in effect, information
relating to transactions against which penalty bids were
assessed, and the date the bid was terminated. The information
would be required to be maintained in a separate file, for a
period of three years, the first two years in an easily
accessible place. The Commission believes that this
recordkeeping requirement will impose little, if any, additional
burden on underwriters, because underwriters already are required
to keep detailed syndicate account records. 95/ Records of such
transactions would provide the Commission with an empirical basis
92/ See 17 CFR 228.502(d) and 229.502(d).
93/ See 17 CFR 228.508 and 229.508.
94/ Once a "plain English" prospectus is implemented, a
stabilizing legend may no longer be required on the inside
front cover of the prospectus. See Task Force Report at 17-
18, supra note 13.
95/ See NASD Rules of Fair Practice, Art. III, Sec. 21, NASD
Manual (CCH) 2171. See also NASD Rules of Fair Practice,
Art. III, Sec. 44, NASD Manual (CCH) 2200D.
==========================================START OF PAGE 56======
for determining whether additional regulation is warranted.
In addition to registered offerings for which a registration
statement or a Form 1-A 96/ is filed, Rule 17a-2 applies to any
other offering if the total proceeds exceed $1,500,000. This
threshold is proposed to be increased to $5,000,000 in Rule 17a-
2. The Commission believes that raising this threshold would
make the rule less burdensome for smaller offerings, and would be
consistent with other Securities Act and Exchange Act
initiatives. 97/
Q62. Is the expansion of Rule 17a-2 to include recordkeeping
of syndicate covering transactions and penalty bids appropriate
and what, if any, burdens would be imposed by these new
requirements?
Q63. Should offerings with proceeds of $5,000,000 or less be
exempt from Rule 17a-2?
F. Rule 105 - Short Sales In Connection With An Offering
The Commission adopted Rule 10b-21 in 1988 to address the
practice of manipulative short sales prior to a public offering
by short sellers who cover their short positions by purchasing
securities in the offering. Manipulative short sales could
result in a lower offering price, and thus reduce proceeds to the
issuer. Rule 10b-21 addresses this practice by prohibiting the
covering from the offering of any short sales made during the
period beginning at the time a registration statement or Form 1-A
is filed and ending at the time that sales may be made pursuant
to the registration statement or Form 1-A.
The Commission is proposing Rule 105 to replace Rule 10b-21.
Rule 105, like Rule 10b-21, is designed to prevent short sales
from being covered with securities obtained from an underwriter,
broker, or dealer who is participating in the offering. Rule 105
would differ from Rule 10b-21 because it would cover only those
short sales effected in the period commencing five business days
prior to the pricing of an offering and ending with such pricing.
Reducing the period of the rule's applicability is consistent
with the structure of Rules 101 and 102, which provide for
shorter restricted periods, and reflects the Commission's belief
that such period should be sufficient to dissipate the effects of
any manipulative short selling on the price of the offered
security.
96/ 17 CFR 249.1a.
97/ See, e.g., Securities Exchange Act Release No. 35895 (June
27, 1995), 60 FR 35642.
==========================================START OF PAGE 57======
Commenters expressed divided views on the efficacy of Rule
10b-21. Some believe that the rule impedes legitimate short
selling activity. Others maintain that the rule would be more
effective if it also covered activity in derivative securities.
Since the adoption of Rule 10b-21, several additional regulatory
measures have been implemented that may lessen the effects of
short selling in connection with an offering. These initiatives,
which include permitting passive market making during offerings
of Nasdaq securities and implementing a short sale rule for the
Nasdaq market, 98/ may reduce the need for Rule 105. Short
selling to depress an offering price would continue to be covered
by the general anti-manipulation provisions of the Securities Act
and the Exchange Act.
Q64. Does a special regulation dealing with short selling in
connection with an offering continue to be necessary or
appropriate?
Q65. Should the prohibitions of Rule 105 extend to short
sales of derivative securities? Commenters should discuss how
this proposal would be consistent with Rule 101, which would not
cover bids or purchases of derivative securities.
Q66. Would the five business day restricted period present
compliance difficulties?
Q67. Should the restricted period of Rule 105 parallel the
one or five business day restricted periods of Rule 101, which
depend on the security's ADTV?
Q68. Should offerings of actively-traded securities (i.e.,
securities having an ADTV value of at least $1 million) be
excluded from Rule 105, as in Rule 101?
IV. SAFE HARBOR ALTERNATIVE
Many commenters endorsed recasting the rules as non-
exclusive safe harbors from the statutory anti-manipulation
provisions of the Exchange Act. 99/ They argued that Rule 10b-6
can have a disproportionate impact on those distribution
participants and affiliated purchasers who inadvertently run
afoul of the rule's prohibitions but do not affect the offered
security's price.
98/ NASD Rules of Fair Practice, Art. III, Sec. 48, NASD Manual
(CCH) 2200H.
99/ Commenters cited Rule 10b-18 as a relevant example of a safe
harbor provision. See supra Section III.C.6. discussing
Rule 10b-18.
==========================================START OF PAGE 58======
The Commission believes that a prophylactic approach to
market activities of persons interested in a distribution
continues to serve an important role in maintaining the integrity
of the capital markets. In the Commission's view, the framework
of proposed Regulation M preserves the Commission's strong
interest in protecting investors from manipulated offerings,
while providing flexibility, clarity, and guidance to offering
participants.
The Commission has stated that the "exceptions [to Rule
10b-6] are not, and never have been, safe harbors," and that a
lack of improper motive when relying on the rule's exceptions
always has been required. 100/ A safe harbor from manipulation
charges is inappropriate in contexts where it is reasonable to
infer that manipulative incentives are present, such as during
securities distributions. Also, requiring the Commission to
demonstrate the existence of a purpose on the part of persons
engaged in any market activity, for example, to "facilitate the
distribution" of an offered security, 101/ would conflict with
the goal of precluding improper market activity prior to pricing
of offerings. The inclusion of a "purpose" element effectively
would make enforcement of such a provision an after-the-fact
remedy that would in many respects overlap Rule 10b-5. Moreover,
it is likely that safe harbor rules would be inappropriate for
some securities offerings, such as those involving penny stocks,
and may be inconsistent with the Commission's express statutory
authority to promulgate rules governing the "pegging, fixing, or
stabilizing" of the price of certain securities. 102/
It is important to note, moreover, that commenters advocated
a safe harbor approach in the context of the current rules. As
proposed, several categories of offerings, persons, and
activities that are subject to the trading practices rules would
not be subject to the prophylactic prohibitions of Regulation M.
In addition, the new rules would create a more flexible framework
for conducting market activities during distributions. The
proposed exception for de minimis violations would address the
concerns commenters had regarding the impact of Rule 10b-6 on
those persons who inadvertently violated the rule through nominal
purchases, or unaccepted bids.
Although the Commission does not favor a safe harbor
approach, commenters may wish to present arguments supporting a
safe harbor framework and to submit draft rule text. Commenters
100/ See Securities Exchange Act Release No. 24003 (January 16,
1987), 52 FR 2994, 2998.
101/ This is a component of the ABA draft proposal.
102/ See Section 9(a)(6) of the Exchange Act.
==========================================START OF PAGE 59======
are urged to provide careful analyses of how a safe harbor
approach would be utilized and what kinds of transactions would
be permitted under a safe harbor. Would safe harbor rules be
appropriate in all contexts and, if not, would it be confusing to
have a set of safe harbor and prophylactic rules governing
substantially similar conduct?
The Commission also requests comment as to whether a safe
harbor approach to anti-manipulation regulation would diminish
the investor protection goals of the Exchange Act. How would the
balance between the capital-raising role of securities offerings
and the Commission's investor protection mandate be affected if a
safe harbor were extended to the general anti-manipulation
provisions?
Support for the safe harbor approach also appears to stem
from concerns regarding application of the general anti-
manipulation provisions to conduct that would be permitted under
the trading practices rules. The Commission requests comment on
alternatives to a safe harbor approach that might address
uncertainty regarding the reach of the general anti-manipulation
provisions in circumstances where the conduct in question
otherwise would be permitted under Regulation M. For example,
should conduct in compliance with Regulation M be presumed not to
violate the general anti-manipulation provisions, subject, of
course, to rebuttal?
V. GENERAL REQUEST FOR COMMENTS
Any interested person wishing to submit written comments on
any aspect of the proposed rules discussed in this release, as
well as on other matters that might have an impact on the
proposals contained herein, is requested to do so. In addition
to the comments solicited above, commenters are urged to provide
their views on the overall structure of proposed Regulation M and
whether the format and the rules contained herein provide a
beneficial alternative to the trading practices rules.
Commenters are encouraged to submit proposed rule text and data
together with their written comments. Comments should be
submitted in triplicate to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should refer to file number S7-11-96.
Comments also may be submitted electronically at the following E-
mail address: rule-comments@sec.gov., and should include the file
number on the subject line of the E-mail.
VI. COSTS AND BENEFITS OF THE PROPOSED AMENDMENTS AND THEIR
EFFECTS ON COMPETITION
To assist the Commission in its evaluation of the costs and
benefits that may result from the proposed new rules, commenters
are requested to provide analyses and data relating to costs and
==========================================START OF PAGE 60======
benefits associated with any of the proposals herein. The
Commission preliminarily believes that compliance burdens
generally will be reduced by the proposed changes. The proposals
would reduce significantly trading restrictions on issuers,
underwriters, and others with an interest in an offering from
those currently in effect and, therefore, should reduce the costs
of raising capital.
In addition, Section 23(a)(2) of the Exchange Act requires
the Commission, in adopting rules under the Exchange Act, to
consider the anti-competitive effects of such rules, if any, and
to balance any impact against the regulatory benefits gained in
terms of furthering the purposes of the Exchange Act. 103/ The
Commission preliminarily has considered the proposed rules in
light of the standards cited in Section 23(a)(2) and believes
preliminarily that, if adopted, they would not likely impose any
significant burden on competition not necessary or appropriate in
furtherance of the Exchange Act. Indeed, the Commission believes
that Regulation M may enhance the posture of U.S. underwriters in
relation to foreign broker-dealers in competing for underwriting
business in cross-border distributions. The Commission solicits
commenters' views regarding the effects of the proposed rules on
competition.
VII. INITIAL REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared an Initial Regulatory
Flexibility Analysis ("IRFA"), in accordance with the provisions
of the Regulatory Flexibility Act, 104/ regarding the rules
contained in proposed Regulation M and the proposed amendments to
Rules 10b-18 and 17a-2 under the Exchange Act and Items 502(d)
and 508 of Regulations S-B and S-K.
As discussed more fully in the analysis, some of the issuers
and broker-dealers that Regulation M would affect are small
entities, as defined by the Commission's rules. In general,
Regulation M overall would decrease costs for issuers and broker-
dealers participating in an offering, including small businesses.
The analysis discusses the types of possible alternative
proposals that the Commission has considered. These include,
among others, the establishment of differing compliance or
reporting requirements or timetables that take into account the
resources available to small entities, and whether such entities
could be exempted from any of the proposed rules, or any part
thereof. Because small entities will benefit from the less
restrictive nature of Regulation M, the Commission does not
103/ See 15 U.S.C. 78w(a)(2).
104/ 5 U.S.C. 603.
==========================================START OF PAGE 61======
believe that any of the alternatives are preferable to the rules
as proposed. Small issuers will benefit from the changes to the
eligibility criteria for Nasdaq passive market making and small
broker-dealers will benefit from the 100 share minimum net
purchasing capacity provided for all passive market makers. The
Commission believes that Regulation M balances the objective of a
simplified, streamlined, more flexible regulation with its
statutory mandate of investor protection in a manner more
appropriate than other alternatives.
In the IRFA, the Commission encourages the submission of
written comments with respect to any aspect of the IRFA. Those
comments should specify costs of compliance with the new rules,
and suggest alternatives that would accomplish the objectives of
modernizing and streamlining the Commission's trading practices
rules.
A copy of the IRFA may be obtained from The Office of Risk
Management and Control, Division of Market Regulation, Securities
and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 5-1,
Washington, D.C. 20549, (202) 942-0772.
VIII. PAPERWORK REDUCTION ACT
Certain provisions of proposed Regulation M contain
"collection of information" requirements within the meaning of
the Paperwork Reduction Act of 1995, 105/ and the Commission has
submitted them to the Office of Management and Budget for review
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The
title for the collection of information is: "Proposed Regulation
M."
A. Collection of Information under Regulation M
Proposed Regulation M would require information collection
in two general areas. First, various provisions of Regulation M
would require persons participating in a distribution to collect
certain information to comply with, or to take advantage of
certain exceptions under, Rules 101 or 102 or to comply with Rule
103. Second, Rule 104 and related amendments would require
disclosure and recordkeeping of persons engaged in stabilization
and certain aftermarket activities.
1. Rules 101, 102, and 103
Rules 101 and 102 would require the ADTV to be calculated
using the three full consecutive calendar months preceding the
filing of the registration statement (or preceding pricing if
there is no registration statement or a shelf distribution is
105/ 44 U.S.C. 3501 et seq.
==========================================START OF PAGE 62======
involved) to determine which restricted period applies, or
whether the security is excepted from the rule. Because the de
minimis exception to Rule 101 is available for purchases of up to
one percent of the security's ADTV, the ADTV calculation also may
be made by a distribution participant seeking to take advantage
of this exception. To determine which restricted period must be
used, or to rely on the actively-traded securities exception or
de minimis exception, a distribution participant would need to
examine publicly available market data to calculate the ADTV.
The Commission believes that the syndicate manager would advise
other distribution participants of the ADTV of the particular
security being distributed. Additionally, the Commission has
requested comment on whether prospectus disclosure is necessary
to inform investors about the potential market activities of
persons relying on the actively-traded securities exception from
Rule 101.
Rule 102 would require issuers and selling securityholders
to calculate the security's ADTV to determine the appropriate
restricted period. In this case, the Commission believes that
the syndicate manager would provide the security's ADTV to the
issuer or selling securityholders. In a small number of self-
underwritten offerings, issuers may calculate the ADTV. Rule 103
would employ the notion of "Nasdaq ADTV," which is defined as the
average daily trading volume of the security accounted for by a
particular market maker, as obtained from the NASD. As the owner
and operator of Nasdaq, the NASD has access to this information,
and now provides that information to the syndicate manager.
The proposed definition of affiliated purchaser in
Regulation M reflects the increasingly complex structure of
financial and other conglomerates by recognizing the structural
separations and information barriers between distribution
participants and their affiliates. Regulation M would provide an
exception to the proposed definition of affiliated purchaser
where certain information barriers exist. This exception would
require the participant to establish, maintain, and enforce
written policies and procedures to segregate the flow of
information between itself and its affiliates. A distribution
participant relying on this exception also would be required to
obtain an independent assessment of the operation of its policies
and procedures governing its information barriers during any
calendar year in which it participates in a distribution.
Rule 101 would provide an exception for de minimis
violations during the restricted period. This provision would
except purchases of less than one percent of the ADTV of the
security in distribution. However, this provision is only
==========================================START OF PAGE 63======
available where the person making such bid or purchase subject to
the exception has established, maintains, and enforces written
policies and procedures reasonably designed to achieve compliance
with the other provisions of Rule 101.
Rule 103 would require passive market makers to notify the
NASD in writing that it intends to conduct passive market making.
Rule 103 also would require the disclosure required pursuant to
Items 502 and 508 of Regulations S-B and S-K with respect to the
intended passive market making activities. This disclosure is
required under Rule 10b-6A. Because Rule 103 extends the
availability of passive market making to offerings of securities
that previously were ineligible, it potentially would increase
the number of respondents submitting such information for passive
market making purposes.
2. Rule 104
Proposed Rule 104 would require disclosure of stabilizing
activities in the offering materials and would expand information
collection with respect to certain aftermarket activities. In
addition, Rule 104 would require any person who places or
transmits a bid that such person knows is for the purpose of
either stabilizing the price of any security to disclose the
purpose of such transaction to the market. Any person placing or
transmitting a stabilizing bid also would be required to disclose
the bid's purposes to the person to whom the bid is placed or
transmitted. In the case of syndicate covering transactions and
penalty bids, disclosure must be made to the appropriate SRO.
Proposed revisions to Rule 17a-2 under the Exchange Act would
require underwriters to keep records of syndicate covering
transactions and penalty bids, in addition to stabilizing
information.
The stabilizing legend required by paragraph (k) of Rule
10b-7, and Item 502(d) of Regulations S-B and S-K would be
replaced by a short legend briefly indicating, in plain language,
the transactions that may affect the offered security's price and
directing investors to a further discussion of these transactions
in the "plan of distribution" section of the prospectus.
Furthermore, Item 508 of Regulations S-B and S-K governing the
plan of distribution disclosure, would be revised to require a
brief description of any prospective stabilizing and aftermarket
activities, including syndicate covering transactions and the
imposition of a penalty bid, and their potential effects on the
marketplace. Although these proposed amendments are directed to
Items 502(d) and 508 of Regulations S-B and S-K, the actual
paperwork burden results from preparing the Commission forms that
reference these items, such as Forms S-1, S-2, and S-3 under the
==========================================START OF PAGE 64======
Securities Act. 106/
B. Proposed Use of the Information
The information collected pursuant to proposed Regulation M
would be used by the Commission, SROs, or investors. The
information required pursuant to Rule 17a-2, however, would be
maintained solely in the syndicate managers' records, to which
the Commission would have access upon request. The Commission
would not regularly receive any of the information described
above, other than through the filing of registration statements
that contain the information in Items 502(d) and 508 of
Regulations S-B and S-K.
The notice provided to the NASD pursuant to proposed Rule
103 would serve to alert the NASD that members of the
underwriting syndicate may engage in passive market making.
Reporting passive market making purchases to the NASD would
further assist in its surveillance of passive market making,
which is an integral component of passive market making. The
Commission would not receive copies of the notices provided to
the NASD. Disclosure in the prospectus that the underwriters may
engage in passive market making would alert the investors of such
potential activity to assist in their investment decisions.
Notifying the market of stabilizing bids, and the SRO of
syndicate covering transactions or penalty bids, would provide
the market or SRO with information on transactions that may
affect the price of the security.
The Commission would use records required pursuant to Rules
104 and related Rule 17a-2 in examinations or investigations of
underwriting activities, and for general regulatory oversight.
This information may be requested or reviewed by the Commission
in connection with its regulatory and enforcement
responsibilities. Investors would use the disclosure required in
Rule 104 and Items 502(d) and 508 of Regulations S-B and S-K to
evaluate a security for investment purposes in light of possible
stabilizing and related activities.
C. Respondents
The exclusion from the coverage of Rule 101 for certain
affiliates of a distribution participant, when information
barriers are established, may be used by every distribution
participant. The Commission does not have information on the
number of broker-dealers who participate in distributions or on
the number of such broker-dealers who have affiliates and would
seek to take advantage of this exception. The Commission
106/ 17 CFR 239.11, 239.12, and 239.13, respectively.
==========================================START OF PAGE 65======
estimates that the number of respondents in this category would
be 100.
The exclusion available for de minimis violations of Rule
101 would be available to all distribution participants that
maintain a written policy for compliance with Regulation M. The
Commission does not have information on the number of broker-
dealers who participate in distributions. The Commission
estimates that the number of respondents in this category would
be 100.
To use the actively-traded securities exception or to
calculate the restricted periods under Rules 101 and 102, or to
engage in aftermarket activities under Rule 104, the Commission
believes that the syndicate manager of each relevant offering
would collect the required information. Over the past five
years, there have been an average of 522 firm commitment
offerings per year. In addition, the Commission believes that in
approximately 50 self-underwritten offerings per year the issuer
would calculate the ADTV.
D. Total Annual Reporting and Recordkeeping Burden
1. Restricted Periods
For each of the estimated 522 firm commitment, public
offerings per year, the Commission believes it would take
approximately one hour for the managing underwriter to calculate
the ADTV, determine the applicable restricted period, and inform
other distribution participants, if any. Approximately 522 hours
would be required annually for these calculations. In addition,
approximately 50 hours would be required annually for issuers to
calculate the ADTV for self-underwritten offerings. In many
circumstances, however, the collection of information would be
unnecessary because satisfaction of the condition would be self-
evident (i.e., the ADTV would be extremely high or extremely
low).
2. Information Barriers
The Commission estimates that approximately 100 broker-
dealers that act as distribution participants in offerings
covered by Regulation M may seek to except the activities of an
affiliate from the regulations. The Commission estimates that
the written policy required for the exemption would take
approximately 40 hours to draft and implement. The Commission
estimates that the annual audit would take approximately 10
hours. Approximately 4,000 hours would be required by this
exemption in the first year and approximately 1,000 hours in each
subsequent year. The Commission believes, however, that this
policy creating the information barrier would be subsumed under
the policies and procedures already put in place by broker-
==========================================START OF PAGE 66======
dealers participating in offerings for the purpose of complying
with other federal and state securities laws.
3. De Minimis Exception
The Commission estimates that approximately 975 broker-
dealers annually will act as distribution participants in
offerings covered by Regulation M. The Commission estimates that
the written policy required for the de minimis exception would
take approximately 40 hours to draft and implement.
Approximately 39,000 hours would be required by this exemption in
the first year.
4. Rule 103
In every firm commitment offering of Nasdaq securities, the
underwriters may seek to engage in passive market making. In
1995, 155 Nasdaq offerings involved passive market making
pursuant to Rule 10b-6A. The managing underwriter would inform
the NASD, receive the data, and inform the syndicate members of
their passive market making status. The Commission estimates
that the written notice required to be provided to the NASD would
involve one hour of preparation. Rule 103, however, makes the
passive market making exemption available for a greater number of
transactions. There were a total of 375 secondary offerings of
Nasdaq securities in 1995, most of which, but not all of which,
could have used passive market making under proposed Rule 103.
Assuming 375 is a reasonable number of offerings in a typical
year and assuming that passive market making would be available
under Rule 103 for all of these offerings, the Commission
estimates that the total burden of Rule 103 would be 375 hours.
5. Stabilizing and Aftermarket Activities
a. Disclosure of Stabilizing Bids to the Market
The Commission does not have a reasonable basis upon which
to estimate how frequently this disclosure will be required
because stabilizing bids rarely occur. In all instances where
such disclosure would be required, the Commission estimates that
it would require 15 minutes.
b. Notice of Penalty Bid
The Commission estimates that disclosing penalty bids would
require six minutes per offering. Using 522 offerings, as
discussed above, this disclosure would require an estimated 52
hours over the course of a year.
6. Rule 17a-2
==========================================START OF PAGE 67======
The Commission estimates that creating and maintaining
records pursuant to this rule would require five hours per
offering. Because most of the records required pursuant to this
rule already are retained as a matter of practice, the Commission
believes that its time estimate should not impose burdens much
greater than already exist with respect to Rule 17a-2. Using 522
offerings, as discussed above, this recordkeeping would require
an estimated 2,610 hours over the course of a year.
7. Items 502 and 508
The Commission estimates that the disclosure required by the
changes to Items 502(d) and 508 of Regulations S-B and S-K would
require 30 minutes per firm commitment offering. The Commission
expects that this burden will be reduced significantly as
respondents become more familiar with the disclosure. If the
respondents using Forms S-1, S-2, S-3, S-11, SB-1, SB-2, F-1, F-
2, and F-3, which incorporate the disclosure required by Items
502(d) and 508, each conducted a firm commitment offering,
disclosing this information would require an estimated 2,391
hours per year.
E. General Information about the Collection of Information
Any collection of information under Regulation M would be a
voluntary action to avoid the otherwise prophylactic measures of
the rules thereunder. Only Rule 17a-2 imposes a three-year
retention period on the collected information. None of the other
rules prescribe retention periods. In general, the information
collected pursuant to Regulation M would be held by the
respondent. The Commission would only gain possession of the
information upon its request. Any information collected pursuant
to Regulation M would not be confidential and would be publicly
available from sources other than the respondent.
F. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
(i) evaluate whether the proposed collection of information
is necessary for the proper performance of the functions of
the agency, including whether the information shall have
practical utility;
(ii) evaluate the accuracy of the Commission's estimate of
the burden of the proposed collection of information;
(iii) enhance the quality, utility, and clarity of the
information to be collected; and
(iv) minimize the burden of collection of information on
==========================================START OF PAGE 68======
those who are to respond, including through the use of
automated collection techniques or other forms for
information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of
Management and Budget, Attention: Desk Officer for the
Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Washington, D.C. 20503, and should also send
a copy of their comments to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and refer to File No. S7-11-96. OMB is
required to make a decision concerning the collections of
information between 30 and 60 days after publication of this
release in the Federal Register, so a comment to OMB is best
assured of having its full affect if OMB receives it within 30
days of this publication.
IX. STATUTORY BASIS AND TEXT OF PROPOSED RULES AND AMENDMENTS
The proposed amendments to Rules 10b-6, 10b-6A, 10b-7, 10b-
8, 10b-18, 10b-21, and 17a-2 would be adopted under the Exchange
Act, 15 U.S.C. 78a et seq., and particularly Sections 2, 3,
9(a)(6), 10(a), 10(b), 13(e), 15(c), 17(a), and 23(a), 15 U.S.C.
78b, 78c, 78i(a)(6), 78j(a), 78j(b), 78m(e), 78o(c), 78q(a), and
78w(a). The proposed amendments to Items 502(d) and 508 of
Regulations S-B and S-K would be adopted under the Securities
Act, 15 U.S.C. 77a et seq., particularly Sections 6, 7, 8, 10,
and 19(a), 15 U.S.C. 77f, 77g, 77h, 77j, and 77s(a); the Exchange
Act, 15 U.S.C. 78a et seq., particularly Sections 3, 4, 10, 12,
13, 14, 15, 16, and 23, 15 U.S.C. 78c, 78d, 78j, 78l, 78m, 78n,
78o, 78p, and 78w; and the Investment Company Act of 1940, 15
U.S.C. 80a-1 et seq., particularly Sections 8 and 38(a), 15
U.S.C. 80a-8 and 80a-37(a). Regulation M would be adopted under
the Securities Act, 15 U.S.C. 77a et seq., particularly Sections
7, 17(a), 19(a), 15 U.S.C. 77g, 77q(a), and 77s(a); the Exchange
Act, 15 U.S.C. 78a et seq., particularly Sections 2, 3, 9(a), 10,
11A(c), 12, 13, 14, 15(c), 15(g), 17(a), 23(a), and 30, 15 U.S.C.
78b, 78c, 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(c), 78o(g),
78q(a), 78w(a), and 78dd-1; and the Investment Company Act of
1940, 15 U.S.C. 80a-1 et seq., particularly Sections 23, 30, and
38, 15 U.S.C. 80a-23, 80a-29, and 80a-37.
List of Subjects
17 CFR Part 228
Reporting and recordkeeping requirements, Securities, Small
businesses.
17 CFR Part 229
==========================================START OF PAGE 69======
Reporting and recordkeeping requirements, Securities.
17 CFR Part 240
Broker-dealers, Confidential business information, Fraud,
Issuers, Reporting and recordkeeping requirements, Securities.
17 CFR Part 242
Broker-dealers, Fraud, Issuers, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, Title 17, Chapter
II of the Code of Federal Regulations is proposed to be amended
as follows:
PART 228 -- INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS
ISSUERS
1. The authority citation for part 228 continues to read
as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn,
77sss, 78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-
37, 80b-11, unless otherwise noted.
2. Section 228.502 is amended by revising the introductory
text of paragraph (d)(1) and paragraph (d)(1)(i) to read as
follows:
228.502 (Item 502) Inside front and outside back cover pages of
prospectus.
* * * * *
(d)(1) Stabilizing and other transactions. (i) Include the
following statement, if true, subject to appropriate modification
where circumstances require.
Certain persons participating in this offering may
engage in transactions that stabilize, maintain, or
otherwise affect the price of (identify securities),
including (list types of transactions). For a
description of these activities, see "Plan of
Distribution."
* * * * *
3. Section 228.508 is amended by adding paragraph (j) to
read as follows:
==========================================START OF PAGE 70======
228.508 (Item 508) Plan of distribution.
* * * * *
(j) Stabilizing and other transactions. If the
underwriters or any selling group members intend to engage in
stabilizing, syndicate short covering transactions, penalty bids,
or any other transaction during the offering that may stabilize,
maintain, or otherwise affect the offered security's price,
indicate such intention and briefly describe such transaction(s).
PART 229 -- STANDARD INSTRUCTIONS FOR FILING FORMS UNDER
SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND
ENERGY POLICY AND CONSERVATION ACT OF 1975 --
REGULATION S-K
4. The authority citation for part 229 continues to read,
in part, as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d),
79e, 79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless
otherwise noted.
* * * * *
5. Section 229.502 is amended by revising the introductory
text of paragraph (d)(1) and paragraph (d)(1)(i) to read as
follows:
229.502 (Item 502) Inside front and outside back cover pages of
prospectus.
* * * * *
(d)(1) Stabilizing and other transactions. (i) Include
the following statement, if true, subject to appropriate
modification where circumstances require.
Certain persons participating in this offering may engage in
transactions that stabilize, maintain, or otherwise affect
the price of (identify securities), including (list types of
transactions). For a description of these activities, see
"Plan of Distribution."
* * * * *
6. Section 229.508 is amended by adding paragraph (l) to
read as follows:
229.508 (Item 508) Plan of distribution.
==========================================START OF PAGE 71======
* * * * *
(l) Stabilizing and other transactions. If the
underwriters or any selling group members intend to engage in
stabilizing, syndicate short covering transactions, penalty bids,
or any other transaction during the offering that may stabilize,
maintain, or otherwise affect the security's price, indicate such
intention and briefly describe such transaction(s).
PART 240 - GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT
OF 1934
7. The authority citation for part 240 is amended by
removing the subauthorities for "Section 240.10b-6" and "Section
240.10b-21" and the general authority continues to read as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29,
80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
8. Section 240.10b-6 is removed and reserved.
9. Section 240.10b-6A is removed.
10. Sections 240.10b-7 and 240.10b-8 are removed and
reserved.
11. Section 240.10b-18 is amended by redesignating
paragraphs (a)(3)(i) through (a)(3)(vi) as paragraphs (a)(3)(ii)
through (a)(3)(vii), and by adding paragraph (a)(3)(i) and
revising paragraphs (a)(5) and (a)(6) to read as follows:
240.10b-18 Purchases of certain equity securities by the issuer
and others.
(a) * * *
(3) * * *
(i) Effected during a distribution (as defined in 242.100
of this chapter) of such stock, or a distribution for which such
stock is a reference security, by the issuer or any of its
affiliated purchasers;
* * * * *
(5) The term plan has the meaning contained in 242.100 of
==========================================START OF PAGE 72======
this chapter;
(6) The term agent independent of the issuer has the
meaning contained in 242.100 of this chapter;
* * * * *
12. Section 240.10b-21 is removed and reserved.
13. Section 240.17a-2 is amended by revising paragraph (a),
the introductory text of paragraph (b), paragraph (b)(1), the
introductory text of paragraph (c), and paragraphs (c)(1) and (d)
to read as follows:
240.17a-2 Recordkeeping requirements relating to stabilizing
activities.
(a) Scope of section. This section shall apply to any
person who effects any purchase of a security for the purpose of,
or who participates in a syndicate or group that engages in,
"stabilizing," as defined in 242.100 of this chapter, the price
of any security to facilitate an offering of any security (other
than an "exempted security," as hereinafter defined); or effects
a purchase that is a "syndicate covering transaction," as defined
in 242.100 of this chapter; or places or transmits a "penalty
bid," as defined in 242.100 of this chapter:
(1) With respect to which a registration statement has
been, or is to be, filed pursuant to the Securities Act of 1933
(15 U.S.C. 77a et seq.);
(2) Which is being, or is to be, offered pursuant to an
exemption from registration under Regulation A ( 230.251
through 230.263 of this chapter) adopted under the Securities Act
of 1933 (15 U.S.C. 77a et seq.); or
(3) Which is being, or is to be, otherwise offered, if the
aggregate offering price of the securities being offered exceeds
$5,000,000.
(b) Definitions. For purposes of this section, the
following definitions shall apply:
(1) The term manager shall mean the person stabilizing or
effecting syndicate covering transactions or placing or
transmitting a penalty bid for his sole account or for the
account of a syndicate or group in which he is a participant, and
who, by contract or otherwise, deals with the issuer, organizes
the selling effort, receives some benefit from the underwriting
that is not shared by other underwriters, or represents any other
underwriters in such matters as maintaining the records of the
distribution and arranging for allotments of the securities
==========================================START OF PAGE 73======
offered.
* * * * *
(c) Records relating to stabilizing, syndicate covering
transactions, and penalty bids required to be maintained by
manager. Any person subject to this section who acts as a
manager and stabilizes or effects syndicate covering
transactions or places or transmits a penalty bid shall:
(1) Promptly record and maintain in a separate file, for a
period of not less than three years, the first two years in an
accessible place, the following information:
(i) The name and class of any security stabilized or any
security in which syndicate covering transactions have been
effected or a penalty bid has been invoked;
(ii) The price, the date, and the time at which each
stabilizing purchase or syndicate covering transaction was
effected by the manager or by any participant in the syndicate or
group;
(iii) The names and the addresses of the members of the
syndicate or group;
(iv) Their respective commitments, or, in the case of a
standby or contingent underwriting, the percentage participation
of each member of the syndicate or group therein; and
(v) The dates when any penalty bid was in effect and the
transactions against which any penalties were assessed.
* * * * *
(d) Notification to manager. Any person who has a
participation in a syndicate account but who is not a manager of
such account, and who effects one or more stabilizing purchases
or syndicate covering transactions for his sole account or for
the account of a syndicate or group, shall within three business
days following such purchase notify the manager of the price,
date, and time at which such stabilizing purchase or syndicate
covering transaction was effected, and shall in addition notify
the manager of the date and time when such stabilizing purchase
or syndicate covering transaction was terminated. The manager
shall maintain such notifications in a separate file, for a
period of not less that three years, the first two years in an
easily accessible place.
14. Part 242 is added to read as follows:
PART 242 -- REGULATION M
==========================================START OF PAGE 74======
Sec.
242.100 Definitions.
242.101 Activities by distribution participants.
242.102 Activities by issuers or selling securityholders during
a distribution.
242.103 Nasdaq passive market making.
242.104 Stabilizing and other activities in connection with an
offering.
242.105 Short selling in connection with a public offering.
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78i(a),
78j, 78k-1(c), 78l, 78m, 78n, 78o(c), 78o(g), 78q(a), 78q(h),
78w(a), 78dd-1, 80a-23, 80a-29, 80a-37.
242.100 Definitions.
For purposes of this section, the following definitions
shall apply:
Affiliated purchaser means:
(1) A person acting, directly or indirectly, in concert
with a distribution participant, issuer, or selling
securityholder in connection with the acquisition or distribution
of any covered security; or
(2) An affiliate who, directly or indirectly, controls the
purchases of such securities by a distribution participant,
issuer, or selling securityholder, whose purchases are controlled
by any such person, or whose purchases are under common control
with any such person; or
(3) An affiliate of a distribution participant, issuer, or
selling securityholder who regularly purchases securities for its
own account or for the account of others, or who recommends or
exercises investment discretion with respect to the purchase or
sale of securities; Provided, however, That this paragraph (3)
shall not apply to an affiliate of a distribution participant
where the following conditions are satisfied:
(i) The affiliate is a separate and distinct organizational
entity from the distribution participant, with no officers (or
persons performing similar functions) or employees (other than
clerical, ministerial, or support personnel) in common with the
distribution participant;
==========================================START OF PAGE 75======
(ii) The affiliate's bids for, purchases of, and
inducements to purchase the securities subject to this section
are made in the ordinary course of its business; and
(iii) The distribution participant:
(A) Establishes, maintains, and enforces written policies
and procedures to segregate the flow of information between
itself and its affiliates that might result in activity
prohibited by 242.101(a); and
(B) Obtains an independent assessment of the operation of
such policies and procedures during any calendar year in which it
participates in a distribution.
Agent independent of the issuer means a trustee or other
person who is independent of the issuer. The agent shall be
deemed to be independent of the issuer only if:
(1) The agent is not an affiliate of the issuer; and
(2) Neither the issuer nor any affiliate of the issuer
exercises any direct or indirect control or influence over the
times when, or the prices at which, the independent agent may
purchase the issuer's securities for the plan, the amounts of the
securities to be purchased, the manner in which the securities
are to be purchased, or the selection of a broker or dealer
(other than the independent agent itself) through which purchases
may be executed; Provided, however, That the issuer or its
affiliate will not be deemed to have such control or influence
solely because it revises not more than once in any three-month
period the basis for determining the amount of its contributions
to the plan or the basis for determining the frequency of its
allocations to the plan, or any formula specified in the plan
that determines the amount of securities to be purchased by the
agent.
At the market offering means an offering of securities at
other than a fixed price.
Average daily trading volume means the world-wide reported
average daily trading volume during the three full consecutive
calendar months immediately preceding the filing of the
registration statement or, if there is no registration statement
or if the distribution involves the sale of securities on a
delayed basis pursuant to 230.415 of this chapter, three full
consecutive calendar months immediately preceding the pricing.
The value of average daily trading volume means the average
trading volume multiplied by the security's price in U.S. dollars
as of the last day of the most recent month.
Business day refers to a twenty-four hour period determined
==========================================START OF PAGE 76======
with reference to the principal market for the securities to be
distributed, and that includes a complete trading session for
that market.
Completion of participation in a distribution. A person
shall be deemed to have completed its participation in a
distribution as follows:
(1)(i) An issuer, when the distribution is completed; and
(ii) An underwriter, when such person's participation has
been distributed, including all other securities of the same
class acquired in connection with the distribution, and any
stabilization arrangements and trading restrictions with respect
to such distribution of which the person is a party have been
terminated; Provided, however, That an underwriter's
participation will not be deemed to have been completed if it
exercises an overallotment option that exceeds the net syndicate
short position; and
(iii) Any other person, when such person's participation
has been distributed.
(2) A person shall be deemed to have distributed securities
acquired by such person for investment.
Covered security means any security that is the subject of a
distribution, or any reference security.
Current exchange rate means the current rate of exchange
between two currencies, which is obtained from at least one
independent entity that provides foreign exchange quotations and
information in the ordinary course of its business.
Distribution means an offering of securities, whether or not
subject to registration under the Securities Act, that is
distinguished from ordinary trading transactions by the magnitude
of the offering and the presence of special selling efforts and
selling methods.
Distribution participant means an underwriter, prospective
underwriter, broker, dealer, or other person who has agreed to
participate or is participating in a distribution.
Eligible security means a Nasdaq security that is the
subject of a distribution, other than an at the market offering
or conducted other than on a best efforts basis, or is the
reference security for such security.
Exchange Act means the Securities Exchange Act of 1934 (15
==========================================START OF PAGE 77======
U.S.C. 78a et seq.).
Independent bid means a bid by a person who is not a
distribution participant, issuer, selling securityholder, or
affiliated purchaser.
NASD means the National Association of Securities Dealers,
Inc.
Nasdaq means the Nasdaq system as defined in 240.11Ac1-
2(a)(3) of this chapter.
Nasdaq ADTV means the average daily trading volume in an
eligible security during the reference period, as obtained from
the NASD.
Nasdaq security means a security that is authorized for
quotation on Nasdaq, and such authorization is not suspended,
terminated, or prohibited.
Net purchases means the amount by which a passive market
maker's purchases exceed its sales.
Passive market maker means a market maker that effects
transactions in accordance with the provisions of 242.103(b).
Penalty bid means an arrangement that permits the managing
underwriter to reclaim a selling concession otherwise accruing to
a syndicate member in connection with an offering when the
securities originally sold by the syndicate member are purchased
in syndicate covering transactions.
Plan consists of any bonus, profit-sharing, pension,
retirement, thrift, savings, incentive, stock purchase, stock
option, stock ownership, stock appreciation, dividend
reinvestment, or similar plan of an issuer or its subsidiaries;
or any dividend or interest reinvestment plan or employee benefit
plan as defined in 230.405 of this chapter. For purposes of
this paragraph and 242.102(c) only, the term "employee" has the
meaning contained in Form S-8 ( 239.16b of this chapter)
relating to employee benefit plans.
Principal market means the single securities market with the
largest aggregate reported trading volume for the class of
securities in the shorter period of the preceding twelve full
consecutive calendar months or the period since the issuer's
incorporation. For the purpose of determining the aggregate
trading volume in a security, the trading volume of depositary
shares representing such security shall be included, and shall be
multiplied by the multiple or fraction of the security
represented by the depositary share. For purposes of this
paragraph, depositary share means a security, evidenced by a
==========================================START OF PAGE 78======
depositary receipt, that represents another security, or a
multiple or fraction thereof, deposited with a depositary. For
purposes of this paragraph, reported refers to prices of
securities that are reported pursuant to 240.11Aa3-1 of this
chapter or that are reported to a foreign financial regulatory
authority as defined in section 3(a)(52) of the Exchange Act (15
U.S.C. 78c(a)(52)).
Prospective underwriter means a person:
(1) Who has submitted a bid to the issuer or other person
on whose behalf the distribution is to be made, and knows or
reasonably expects that such bid will be accepted, whether or not
the terms and conditions of the underwriting have been agreed
upon; or
(2) Who has reached, or reasonably expects to reach, an
understanding with the issuer, selling securityholder, or
managing underwriter that such person will become an underwriter,
whether or not the terms and conditions of the underwriting have
been agreed upon.
Reference period means the three full consecutive calendar
months immediately preceding the filing of the registration
statement or, if there is no registration statement or if the
distribution involves the sale of securities on a delayed basis
pursuant to 230.415 of this chapter, three full consecutive
calendar months preceding the pricing.
Reference security means a security whose price is, or may
in the future be, used to determine, in whole or in significant
part, the value of a security that is the subject of a
distribution.
Restricted period means the period beginning:
(1) For any security with an ADTV value of $100,000 or
more, on the later of one business day prior to the determination
of the price of the security to be distributed or such time that
a person becomes a distribution participant, and ending upon the
completion of such person's participation in the distribution; or
(2) For all other securities, on the later of five business
days prior to the determination of the price of the securities to
be distributed or such time that a person becomes a distribution
participant, and ending upon the completion of such person's
participation in the distribution.
Securities Act means the Securities Act of 1933 (15 U.S.C.
77a et seq.).
==========================================START OF PAGE 79======
Selling securityholder means any person on whose behalf a
distribution is made, other than the issuer.
Stabilizing means the placing of any bid, or the effecting
of any purchase, for the purpose of pegging, fixing, or
maintaining the price of a security.
Syndicate covering transaction means the placing of any bid
or the effecting of any purchase on behalf of the sole
distributor or the underwriting syndicate or group to reduce a
syndicate short position.
30% ADTV Limit means 30 percent of the market maker's Nasdaq
ADTV.
Transaction means a bid or a purchase.
Underwriter means a person who has agreed with an issuer or
selling securityholder:
(1) To purchase securities for distribution; or
(2) To distribute securities for or on behalf of such
issuer or selling securityholder; or
(3) To manage or supervise a distribution of securities for
or on behalf of such issuer or selling securityholder.
242.101 Activities by distribution participants.
(a) UNLAWFUL ACTIVITY. In connection with a distribution
of securities, it shall be unlawful for a distribution
participant or an affiliated purchaser of such person, directly
or indirectly, to bid for, purchase, or to attempt to induce any
person to bid for or purchase a covered security during the
applicable restricted period.
(b) EXCEPTED ACTIVITY. The following activities shall not
be prohibited by paragraph (a) of this section:
(1) Research. The publication or dissemination, in the
ordinary course of business, of any information, opinion, or
recommendation, if the conditions of 230.138 or 230.139 of
this chapter are met; or
(2) Transactions complying with certain other sections.
Transactions complying with 242.103 or 242.104; or
(3) Odd-lot transactions. Transactions in odd-lots; or
(4) Exercises of securities. The exercise of any option or
==========================================START OF PAGE 80======
warrant, any right received in connection with a rights offering,
or any right or conversion privilege set forth in the instrument
governing a security to acquire any security directly from the
issuer; or
(5) Unsolicited brokerage. Unsolicited brokerage
transactions; or
(6) Basket transactions. (i) Transactions in connection
with a basket of securities in which the security that is the
subject of the distribution does not comprise more than five
percent of the value of the basket purchased and such basket
contains a minimum of 20 securities; or
(ii) Adjustments to such a basket in the normal course of
business as a result of a change in the composition of the
components of a standardized index; or
(7) De minimis transactions. Purchases of less than one
percent of the average daily trading volume of the security, or
unaccepted bids; Provided, however, That the person making such
bid or purchase has established, maintains, and enforces written
policies and procedures reasonably designed to achieve compliance
with the other provisions of this section; or
(8) Transactions in connection with the distribution. (i)
Transactions among distribution participants in connection with
the distribution, or purchases of securities from an issuer or
selling securityholder necessary to conduct the distribution,
effected otherwise than on a securities exchange or through an
inter-dealer quotation system; and
(ii) Offers to sell or the solicitation of offers to buy
the securities being distributed (including securities acquired
in stabilizing), or securities offered as principal by the person
making such offer to sell or solicitation of offers to buy; or
(9) Distributions of 144A securities. Transactions in
securities eligible for resale under 230.144A(d)(3) of this
chapter, if:
(i) Such securities are offered or sold in the United
States solely to qualified institutional buyers, as defined in
230.144A(a)(1) of this chapter, or to offerees or purchasers that
the seller and any person acting on behalf of the seller
reasonably believes are qualified institutional buyers, in a
transaction exempt from registration under section 4(2) of the
Securities Act (15 U.S.C. 77d(2)) or 230.144A or 230.501
through 230.508 of this chapter; or
(ii) During a distribution qualifying under paragraph
(b)(9)(i) of this section, such securities are offered or sold
==========================================START OF PAGE 81======
concurrently to persons not deemed to be "U.S. persons" for
purposes of 230.902(o)(2) or 230.902(o)(7) of this chapter.
(c) EXCEPTED SECURITIES. The provisions of this section
shall not apply to any of the following securities:
(1) Actively-traded securities. Securities with an ADTV
value of at least $1 million; or
(2) Investment grade nonconvertible securities.
Nonconvertible debt securities or nonconvertible preferred
securities; Provided, however, That at least one nationally
recognized statistical rating organization, as that term is used
in 240.15c3-1 of this chapter, has rated the nonconvertible
securities being distributed in one of its generic rating
categories that signifies investment grade; or
(3) Exempted securities. "Exempted securities" as defined
in section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12));
or
(4) Face-amount securities or securities issued by an open-
end management investment company or unit investment trust.
Face-amount certificates issued by a face-amount certificate
company, or redeemable securities issued by an open-end
management investment company or a unit investment trust. Any
terms used in this paragraph (c)(4) that are defined in the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) shall
have the meanings specified in such Act.
(d) EXEMPTIVE AUTHORITY. Upon written application or upon
its own motion, the Commission may grant an exemption from the
provisions of this section to any transaction or transactions,
either unconditionally or on specified terms and conditions.
242.102 Activities by issuers and selling securityholders
during a distribution.
(a) UNLAWFUL ACTIVITY. In connection with a distribution
of securities, it shall be unlawful for an issuer, selling
securityholder, or an affiliated purchaser of such person,
directly or indirectly, to bid for, purchase, or to attempt to
induce any person to bid for or purchase a covered security
during the applicable restricted period.
(b) EXCEPTED ACTIVITY. The following activities shall not
be prohibited by paragraph (a) of this section:
(1) Odd-lot transactions. Transactions in odd-lots; or
(2) Transactions complying with 270.23c-3. Transactions
complying with 270.23c-3 of this chapter; or
==========================================START OF PAGE 82======
(3) Exercises of securities. The exercise of any option or
warrant, any right received in connection with a rights offering,
or any right or conversion privilege set forth in the instrument
governing a security to acquire any security directly from the
issuer; or
(4) Transactions in connection with the distribution.
Offers to sell or the solicitation of offers to buy the
securities being distributed.
(c) PLANS. (1) Paragraph (a) of this section shall not
apply to distributions of securities by or on behalf of an issuer
or a subsidiary of an issuer pursuant to a plan, which are made:
(i) Solely to employees or securityholders of the issuer or
its subsidiaries, or to a trustee or other person acquiring such
securities for the accounts of such persons; or
(ii) To persons other than employees or securityholders, if
bids for or purchasers of securities pursuant to such plan are
effected solely by an agent independent of the issuer and the
securities are from a source other than the issuer.
(2) Bids or purchases of any security made or effected by
or for a plan shall be deemed to be a purchase by the issuer
unless the bid is made, or the purchase is effected, by an agent
independent of the issuer.
(d) EXCEPTED SECURITIES. The provisions of this section
shall not apply to any of the following securities:
(1) Exempted securities. "Exempted securities" as defined
in section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12));
or
(2) Face-amount securities or securities issued by an open-
end management investment company or unit investment trust.
Face-amount certificates issued by a face-amount certificate
company, or redeemable securities issued by an open-end
management investment company or a unit investment trust. Any
terms used in this paragraph (d)(2) that are defined in the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) shall
have the meanings specified in such Act.
(e) EXEMPTIVE AUTHORITY. Upon written application or upon
its own motion, the Commission may grant an exemption from the
provisions of this section to any transaction or transactions,
either unconditionally or on specified terms and conditions.
==========================================START OF PAGE 83======
242.103 Nasdaq passive market making.
(a) SCOPE OF SECTION. This section permits broker-dealers
to engage in market making transactions in eligible securities
without being in violation of the provisions of 242.101, except
when a stabilizing bid for such security is in effect pursuant to
242.104.
(b) CONDITIONS TO BE MET.
(1) General limitations. A passive market maker must
effect all transactions in the capacity of a registered market
maker on Nasdaq. Except as provided below, a passive market
maker shall not display a bid for or purchase an eligible
security at a price that exceeds the highest independent bid for
the eligible security at the time of the transaction; Provided,
however, That a passive market maker may purchase an eligible
security at a price that exceeds the highest independent bid for
such security at the time of the transaction to comply with a
rule promulgated by the Commission or NASD governing the
execution of customer orders.
(2) Requirement to lower the bid. If all independent bids
for an eligible security are lowered below the passive market
maker's bid, the passive market maker must lower its bid to a
level not higher than the then highest independent bid; Provided,
however, That a passive market maker may continue to maintain a
bid and effect purchases at its bid at a price exceeding the then
highest independent bid until the passive market maker purchases
an amount of the eligible security that equals or, through the
purchase of all securities that are part a single order, exceeds
two times the minimum quotation size for the security, as
determined by NASD rules.
(3) Purchase limitation. On each day, a passive market
maker's net purchases shall not exceed its 30% ADTV Limit;
Provided, however, That a passive market maker may purchase all
of the securities that are part of a single order that, when
executed, results in its 30% ADTV Limit being equalled or
exceeded. If a passive market maker's net purchases equal or
exceed its 30% ADTV Limit, it shall immediately withdraw its
quotations from Nasdaq, and it may not effect any transaction in
the eligible security for the remainder of that day, irrespective
of any additional sales during that day, unless otherwise
permitted by 242.101.
(4) Limitation on displayed size. At all times, the
passive market maker's displayed bid size may not exceed the
smaller of the minimum quotation size for the eligible security,
or the passive market maker's remaining purchasing capacity under
this paragraph (b)(4); Provided, however, That a passive market
==========================================START OF PAGE 84======
maker whose purchasing capacity at any time is between one and 99
shares may display a bid size of 100 shares.
(5) Identification of a passive market making bid. The bid
displayed by a passive market maker shall be designated as such.
(6) Notification and reporting to the NASD. A passive
market maker shall notify the NASD in writing in advance of its
intention to engage in passive market making. A passive market
maker shall submit to the NASD information regarding passive
market making purchases in such form as the NASD shall prescribe.
(7) Prospectus disclosure. The prospectus for any
registered offering in which any passive market maker intends to
effect transactions in any eligible security shall contain the
information required in 228.502, 228.508, 229.502, and 229.508
of this chapter.
(c) TRANSACTIONS AT PRICES RESULTING FROM UNLAWFUL
ACTIVITY. No transaction shall be made at a price that the
passive market maker knows or has reason to know is the result of
activity that is fraudulent, manipulative, or deceptive under the
Securities Act, the Exchange Act, or any rule or regulation
thereunder.
242.104 Stabilizing and other activities in connection with an
offering.
(a) UNLAWFUL ACTIVITY. It shall be unlawful for any
person, directly or indirectly, to effect any stabilizing
transaction or any syndicate covering transaction or to place or
transmit a penalty bid in connection with an offering of any
security, in contravention of the provisions of this section.
(b) PURPOSE. No stabilizing transaction shall be made
except for the purpose of preventing or retarding a decline in
the market price of a security.
(c) PRIORITY. To the extent permitted or required by the
market where stabilizing occurs, any person stabilizing shall
grant priority to any independent bid at the same price
irrespective of the size of such independent bid at the time that
it is entered.
(d) CONTROL OF STABILIZING. No sole distributor or
syndicate or group stabilizing the price of a security or any
member or members of such syndicate or group shall maintain more
than one stabilizing bid in any one market at the same price at
the same time.
(e) STABILIZING AT PRICES RESULTING FROM UNLAWFUL ACTIVITY.
No stabilizing shall be effected at a price that the person
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stabilizing knows or has reason to know is in contravention of
this section, or is the result of activity that is fraudulent,
manipulative, or deceptive under the Securities Act, the Exchange
Act, or any rule or regulation thereunder.
(f) STABILIZING PROHIBITED IN AT THE MARKET OFFERINGS. No
person shall stabilize any at the market offering.
(g) STABILIZING LEVELS.
(1) No stabilizing above offering price. No stabilizing
shall be effected in a security at a price above the offering
price. If stabilizing is effected before the initial public
offering price is determined, and such offering price is higher
than the stabilizing bid or purchase price, then stabilizing may
be resumed after determination of the public offering price at
the price at which stabilizing could then be effected.
(2) Stabilizing when the principal market is open. Except
as limited by the other provisions of this paragraph (g), no
stabilizing shall be effected in any market at a price higher
than the stabilizing bid in the principal market for the
security, or, if there is no stabilizing bid in the principal
market, the highest independent bid for the security in its
principal market.
(3) Stabilizing when the principal market is closed.
Except as limited by the other provisions of this paragraph (g),
before the opening of quotations for the security in the market
where stabilizing will be effected, no stabilizing shall be
effected at a price in excess of the lower of:
(i) The price at which stabilizing could have been effected
at the close of the principal market; or
(ii) The most current reported price at which independent
transactions in the offered security have been effected in any
market after the close of the principal market. After the
opening of quotations in the market where stabilizing will be
effected, no stabilizing shall be effected at a price higher than
the highest independent bid for such security in that market.
(4) Adjustments to stabilizing price. (i) A stabilizing
bid may be increased to a price no higher than the price at which
stabilizing could then be lawfully initiated. A stabilizing bid
that is lawful under this section when initiated may be
maintained continuously or reduced irrespective of changes in the
independent bid of the security.
(ii) If a security goes ex-dividend, ex-rights, or ex-
distribution, the price at which such security is being
stabilized shall be reduced by an amount equal to the value of
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the dividend, right, or distribution. If a stabilizing bid is
expressed in a currency other than the currency of the principal
market for the security, such bid may be initiated, maintained,
or adjusted to reflect the current exchange rate. If, in
entering, maintaining, or adjusting a bid pursuant to this
paragraph (g)(4), the adjusted bid would be at or below the
midpoint between two trading differentials, such stabilizing bid
shall be adjusted downward to the lower differential.
(5) Special prices. Any stabilizing price that otherwise
meets the requirements of this section need not be adjusted to
reflect special prices available to any group or class of persons
(including employees or holders of warrants or rights).
(h) DISCLOSURE AND NOTIFICATION. (1) Any person placing
or transmitting a bid that such person knows is for the purpose
of stabilizing the price of any security shall provide prior
notice of such transaction to the market on which such
transaction is effected, and disclose the purpose of such
transaction to the person with whom the bid is placed or is
transmitted.
(2) Any person effecting a syndicate covering transaction
or placing or transmitting a penalty bid shall provide prior
notice of such syndicate covering transaction or penalty bid to
the self-regulatory organization with direct authority over the
market on which such syndicate covering transaction is effected
or such penalty bid is placed or transmitted.
(3) Any person subject to this section who sells to, or
purchases for the account of, any person any security where the
price of such security may be or has been stabilized or where a
syndicate covering transaction may be or has been effected for
such security or where a penalty bid may be or has been in
effect, shall give the purchaser at or before the completion of
the transaction, a prospectus, offering circular, confirmation,
or other writing containing a statement similar to that
comprising the statement provided for in Item 502(d) of
Regulation S-B ( 228.502(d) of this chapter) or Item 502(d) of
Regulation S-K ( 229.502(d) of this chapter).
(i) RECORDKEEPING REQUIREMENTS. A person subject to this
section shall keep the information and make the notification
required by 240.17a-2 of this chapter.
(j) EXCEPTED SECURITIES. The provisions of this section
shall not apply to any of the following securities:
(1) Exempted securities. "Exempted securities," as defined
in section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12));
or
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(2) Rule 144A eligible securities. Any distribution of
securities eligible for resale under 230.144A(d)(3) of this
chapter, if:
(i) Such securities are offered or sold in the United
States solely to qualified institutional buyers, as defined in
230.144A(a)(1) of this chapter, or to offerees or purchasers that
the seller and any person acting on behalf of the seller
reasonably believes are qualified institutional buyers, in a
transaction exempt from registration under section 4(2) of the
Securities Act (15 U.S.C. 77d(2)) or 230.144A or 230.501
through 230.508 of this chapter; or
(ii) During a distribution qualifying under paragraph
(j)(2)(i) of this section, such securities are offered or sold
concurrently to persons not deemed to be "U.S. persons" for
purposes of 230.902(o)(2) or 230.902(o)(7) of this chapter.
(k) EXEMPTIVE AUTHORITY. Upon written application or upon
its own motion, the Commission may grant an exemption from the
provisions of this section to any transaction or transactions,
either unconditionally or on specified terms and conditions.
242.105 Short selling in connection with a public offering.
(a) UNLAWFUL ACTIVITY. In connection with a distribution
of securities offered for cash ("offered securities") pursuant to
a registration statement or a notification on Form 1-A ( 239.90
of this chapter) filed under the Securities Act, it shall be
unlawful for any person to cover a short sale with offered
securities purchased from an underwriter or broker or dealer
participating in the offering, if such short sale occurred during
the shorter of:
(1) The period beginning five business days before the
pricing of the offered securities and ending with the pricing; or
(2) The period beginning with such filing and ending with
the pricing.
(b) EXCEPTED OFFERINGS. This section shall not apply to
offerings filed under 230.415 of this chapter or to offerings
that will not be conducted on a firm commitment basis.
(c) EXEMPTIVE AUTHORITY. Upon written application or upon
its own motion, the Commission may grant an exemption from the
provisions of this section to any transaction or transactions,
either unconditionally or on specified terms and conditions.
By the Commission.
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Jonathan G. Katz
Secretary
Date: April 11, 1996